DeFi Liquidity Providers and Uniswap’s 1st Birthday

Searching for Liquidity

Decentralized exchange protocol, 0x, announced a major upgrade, which ZRX holders are currently voting on. “0x v3” as its dubbed has three key features according to the company’s blogpost:

“Version 3 of 0x is a major protocol upgrade that will deepen liquidity for the DeFi ecosystem and improve the developer experience of building on 0x.
The robust v3 feature set includes a new ZRX staking mechanism, DEX liquidity aggregation, the ability for relayers to support flexible fees, and various technical improvements for ecosystem devs.”

As background, 0x launched in 2017 after conducting a successful ICO. It is not a decentralized exchange itself but a set of smart contracts that enable 0x relayers to aggregate trades and liqduidity. A trader submits an order to a 0x-based DEX such as Radar Relay, which will then transmit the order to other 0x relayers who can fill the order.

There isn’t an obvious need for a native utility token. But 0x raised money in 2017 when that was the thing to do, so they have a token, ZRX. In 0x v1 and v2, ZRX is needed to pay fees and used for governance of the protocol.

Out with the old, in with the new. In v3, fees can be paid in any token, which is a relief for market makers. Now, ZRX holders will be able to stake their ZRX and receive proceeds from the market-maker rewards pool.

Market Makers wanted. Like any new exchange, 0x is desperate to attract market makers that can provide the liquidity to process larger orders.

There have been other liquidity incentive programs in the space. Bancor in September to airdrop its treasury’s ETH to incentivize retail liquidity providers. Bancor took a page out of the playbook of Synthetix, which directs a portion of its inflation to ETH addresses who have contributed to the ETH-sETH liquidity pool on Uniswap.

Sharing amongst market makers. In v3 of 0x, there is a new transaction fee for all trades that is directed into a market making reward pool. More:

“For each 0x trade, the buyer (also known as a taker) pays a small protocol fee denominated in Ether that is calculated as a multiple of the trade’s gas price. The fees are routed into a Liquidity Rewards Pool over the course of a 10-day interval, known as an epoch. At the end of each period, the Liquidity Rewards are automatically distributed to market makers based on their trade activity and the amount of ZRX staked over the epoch.”

Market makers benefit directly from the rewards program while ZRX holders can earn a portion of the rewards by staking ZRX.

The last new feature in 0x v3 aims to integrate competing DEXs into the protocol. Through the proposed “0x API”, 0x orders can be filled by Uniswap, Oasis or Kyber through “Liquidity Bridges”. Full disclosure: I work at Concourse Open, who’s DEX.AG product aggregates liquidity from five DEXs, including 0x-based Radar Relay. It did $1.2m in volume last week.

The Liquidity Wars. Uniswap just turned 1 (more at bottom of newsletter), while Kyber has consistently had the highest volume of any DEX. Meanwhile, Maker’s Oasis is well positioned to become the first one-stop shop for DeFi.

Multicoin’s Kyle Samani had an excellent post last week on the growth in ecosystems around major exchanges, particularly in Asia:

“The trend is clear: Crypto exchanges are (re)building every major financial service from 100- year-old services like lending to crypto-native services like staking. What’s more, the pace at which exchanges are rolling out new services is accelerating.”

While the size of the DeFi space is much smaller the dynamics may be similar. While lending proved to be the breakthrough product of 2019, trading has created crypto-empires revolved around exchanges. But given the non-custodial nature of DeFi, wallets may emerge as a competitor to exchanges.

Number of the Week: Maker hits debt ceiling

The circulating supply of Dai has hit the 100m debt ceiling limit, as investors flocked to open CDPs (aka vaults…) after the stability fee was lowered to 5.5%. Maker announced plans to raise the debt ceiling by an additional 10m before the launch of Multi-Collateral Dai.

Tweet of the Week: Who are CDP users?

DDEX founder Bowen Wang explores the Ethereum addresses of the 10 largest CDP holders. He finds that several were participants in the ETH ICO along with other interesting on-chain tidbits.

Long read of the week: Uniswap’s first birthday

“In Hong Kong, I was able to catch up with Vitalik, who took a look at my finalized Uniswap’s code. He caught one error that even Runtime Verification had missed. I misspelled “recipient” as “recipeint” about 20 times.”

In celebration of one year since its launch on Ethereum, Uniswap founder Hayden Adams details the founding backstory of the DEX. Lots of hard work to launch a beautifully simple idea.

Odds and Ends

  • Introducing Maple, smart bonds backed by cryptoassets Link

  • Polychain-backed Paradigm Labs unveils DeFi liquidity solutions Link

  • gets a facelift Link

  • 30 days of ETH – October 2019 Link

  • Maker CDPs shall from henceforth be referred to as ‘Vaults’ Link

  • IDEX announces IDEX2.0 with Layer 2 scaling solutions Link

  • RealT lists first security token (real estate) on Uniswap Link

  • Kyber ecosystem report # 8 Link

Thoughts and Prognostications

  • The world has gone mad and the system is broken [Ray Dalio]

  • Prize-linked savings like PoolTogether can increase savings rates [Spencer Noon]

  • Optimistic vs ZK rollup: Deep Dive [Matter Labs]

  • Metamask extensibility and consequences for the ecosystem [Ben DiFrancesco]

  • The returns of HODLing vs. DeFi-ing [Zerion]

  • Synthetics are the future of Maker, not Dai [Ken Chan]

  • Ethereum is now unforkable, thanks to DeFi [Dragonfly]

  • Exploring DeFi trading strategies: arbitrage in DeFi [The Block]

Listen of the Week: Balaji and Glen Weyl

“The opportunity to exit is much more meaningful when exercised collectively, and if you exercise it collectively, it has to be part of a democratic collective decision that all of you are making to make that decision to…exit.”

Two of the smartest people on the planet, Glen Weyl and Balaji Srinivasan joined the Village Global podcast to discuss identity, how the nation-state will evolve or demise and the new political and social forces that will affect cryptonetworks in the future.

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