Aug 9, 2020 11:04 UTC
Aug 9, 2020 at 11:04 UTC
In spite of Fundamentals Lagging the Yield Farming Fuels Buzz Around DeFi:
The propaganda neighboring dispersed finance is occasionally credited with activating a broader market rise in July, as current protocols started liberating tokens that were instantly posting gains of numerous times their preliminary value. Notwithstanding positive price growth; nevertheless, it is not directly clear if the sector was entirely grown, as reliable metrics to measure the fundamental recital of DeFi protocols are unbelievably hard to come by. The developments lend themselves to reasonably severe analysis approaches, as they will often have well-defined proceeds & expenses. But the rise of liquidness mining, or yield farming, is tossing the metrics off balance in some ways. Protocols recompense their users with their governance tokens, fundamentally as a payment for using the platform. A frenzied movement to make the most of the yield for these tokens slanted the current DeFi triumph metric, Total Value Locked.
A vibrant instance of this is the Compound protocol where the value of Dai supplied to it exceeds its total amount of tokens by almost three times $1.1 billion vs. $380 million in existence as of writing. This is due to Compound users ingoing leveraged positions on Dai approximately that generally does not happen with stable coins. While this led the community to converse the merits of TVL, some other alike dimensions have been distorted as well.
Assessing a DeFi advancing project
Valuation metrics will change somewhat based on the type of project. In the instance of lending protocols like Compound & Aave, TVL characterizes the supply-side liquidity of the project or the entire sum of all deposits presently held by them. It is worth observing that TVL only takes the on-chain reserves into account. Rendering to DeFi Pulse, there are only about 220 million Dai locked in Compound, not 1.1 billion. Though, lending providers are commonly evaluated based on book value, or how much is being borrowed. Since that is what generates revenue, it’s measured a much supplementary straight measurement of the protocol’s financials.
Due to the distribution of the network’s coin, COMP, however, all tokens except Tether (USDT) & 0x (ZRX) have a robust adverse interest when borrowing, conferring to Compound’s dashboard, a sense that users are paid to do so. The Compound protocol is at present offloading that cost to the buyers & holders of COMP by dilution.
However, it may be challenging to filter out how much liquidity there is only to speculate on COMP yields; this may not be essential. The determination of evaluating the bank’s or lending protocol’s revenue is to gauge how considerable of that value can be captured over the stock or token. However, later the token is actuality used to subsidize the price of borrowing, the worth is actuality efficiently extracted from its holders. This can be seen over COMP’s token price. Subsequently, its release has sustained to fall in value due to the dilution and selling pressure from newly mined tokens. Due to this spectacle, an evaluation strategy for Compound might easily disregard or even subtract the portion of the book value that is extracting value from token holders. Similarly, in the previous case, Compound’s book worth would be $25 million out of a claimed $1 billion the entire sum of the USDT and ZRX being borrowed.
Nevertheless, not all assets are there just for the yield, Cointelegraph previously reported that only $30 million worth of Dai was being rented just formerly it converted the go-to currency for liquidity mining. Andre Cronje, the initiator of the yEarn protocol, told that the market has not been captivating these distinctions into interpretation:
“We have this weird TVL equals evaluation mentality, which I do not understand at all, where if the TVL is $100M, then the market cap — circulating, not fully diluted should be $100M.“
Even though he finds it “completely insane” to disregard income, he sustained his assumed exercise:
“So, if circulating market cap equals TVL, what’s the best way to increase that? Increase TVL. How do you increase TVL? Reward with tokens. Token value goes up because of TVL speculation, & repeat the loop.“
Impact on other protocols
Compound initiated the yield farming trend, but it was not the lonely protocol that saw sizable increases inactivity. Devolved exchanges like Uniswap, Balancer, and Curve have seen their trading volumes jump vividly since June. Volume on Curve, a DEX absorbed on swapping stablecoins with one another, hopped as yield farming commenced in June.
Uniswap has a more diverse offering, and most of its volume comprises Ether (ETH) to stablecoin pairs, especially Ampleforth, which saw an influential boom-and-bust cycle happen. It has also occupied in an ample of the volume for new tokens like YFI, habitually being the first place where they remained listed. MakerDAO observed its TVL almost triple from $500 million. The mainstream of that is due to the Ether price rally, though it grew in terms of ETH & Bitcoin (BTC) as well. As formerly reported, the community decided to upsurge the total amount of Dai that might be minted to reoccurrence its price to $1.
Whereas at face value, the growth of Dai may be considered a success story, the Maker community decided to put interest rates for practically all liquid assets to zero, preceding any revenue from the growth. At the similar time, Compound has been the primary recipient of new Dai, with locked value having increased from about $140 million to $210 million later late July, over 55% of all Dai.
Is the growth real?
The liquidity mining boom had an unquestionably optimistic impact on some general metrics, precisely the visitor volumes for DeFi platform websites & the number of users interrelating through the protocols. Data from SimilarWeb displays that traffic to Compound partakes quadrupled June subsequently to about 480,000, while for Uniswap, it has additionally doubled to 1.1 million, & Balancer established a strong presence in two months with 270,000 monthly appointments. Furthermore, the DeFi exchange aggregator 1inch. Exchange nearly tripled its traffic in the last two months. Protocols with a feebler relation to harvest farming promoted as well, with MakerDAO and Aave posting more modest but still significant growth.
In footings of user volume, Compound saw the quantity of monthly average unique wallets using it quadruple to 20,000 in June, however that quantity has since been decreasing. Likewise worth noting is that more than 80% of current activity has been from just 30 wallets, according to DappRadar data. The complete number of DeFi users, according to a DuneAnalytics visualization, amplified by about 50% from June 1 to August 1. This is in disparity to the other two-month time from April 1 to May 31, which saw a 30% growth.
The majority of fresh users are coming from dispersed exchanges, with Uniswap having doubled its entire user base since June to 150,000. Nevertheless, this metric displays all the users who have interrelated with the protocols, not only those who are active at any given moment.
What will remain?
In summary, the DeFi progress in the preceding two months is multi-faceted. While the liquidity mining hype & succeeding price gains have likely contributed to attracting added attention, fundamental metrics turn out to be highly partial due to the speculation.
Decentralized interactions appear to have benefited the furthermost from the hype, both in terms of new users & volumes, but that gives the impression to be an acceleration of an already positive trend. Whether the progress will stick remains an important question: Kain Warwick, a co-founder of Synthetix, a crypto-backed asset issuer.
“It’s always possible that people will farm the yield and then find a fresh field, so bootstrapping liquidity is not a guarantee that your protocol will retain users. […] But bootstrapping liquidity with some sort of incentive is a great way to attract newcomers because if you have anything resembling product-market fit, then there is likely to be some stickiness.“
Cronje was to some extent more negative, using a farming analogy to describe what could happen, saying: “All the yield pursuers just running in to farm yield and then leaving,” which is an annoying thing rendering to him, acting like a horde of locusts, totaling:
“But after they have ruined the crops, sometimes, a stronger crop can grow, and some locusts remain, and they end up being symbiotic instead of the initial parasitic.“
Cronje trusts that the initial effects of yield farming are unmaintainable, creating a false perception amongst newcomers that 1,000% yields are the norm. When that is no longer the case, handlers will be left with a bad taste in their mouths, and he contends:
“Right now, it’s overhyped; soon, it will be hated; and what remains after that, I think, will be pretty cool.“
Distributing tokens in a new way
Warwick pronounced the persistence of liquidity mining as incentivizing early participation with partial ownership. Cronje was plentiful more skeptical, saying: “All liquidity mining currently is, is being paid for upheld up TVL.” Still, he entered a liquidity mining program himself, though he stressed that it was just a way of distributing tokens.
“My goal was to get an active and engaged community. And I think yEarn managed to accomplish that,” Cronje concluded. By contrast, yEarn forks like YFFI and YFII were “pure liquidity mines, and all that happened was people sold,” he supposed. The price of YFII has distorted by 90% since its high on July 30.
Warwick is renowned that “there possibly is a better way to distribute ownership while bootstrapping growth,” though he does not know-how. He still discovers it preferable to initial coin offerings, as users only need to provisionally obligate their liquidity: “They’re obviously taking on some platform risk, but it’s preferable still to lose their capital by using it to buy tokens.” But whereas the risks for the liquidity miners may be low, the example of YFII shows that the effects of dilution & speculative request can turn catastrophic for the buyers of these tokens.