DeFi’s next growth driver

What is locked in DeFi?

As DeFi proliferates across the blockchain space, the Total Value Locked metric (TVL) serves as a useful if imperfect tool for measuring progress across projects. It can also highlight the growth of the industry as a whole and help identify where that growth is coming from.

At the moment, there’s just under $700m locked in DeFi, according to DeFi Pulse. That number has been on a steady climb over the past year.

The growth from April to June was primarily fueled by the rise in ETH price and ETH locked in DeFi actually dropped in absolute numbers during the bull market.

Just under 2.5% of Ethereum’s circulating supply is now locked in DeFi. That is a tremendous accomplishment, but flows into DeFi do not have to come through ETH alone. In fact, much of the recent growth has been additional assets, like stablecoins, flowing into the space.

In terms of assets locked in DeFi, ETH is twice as large as all the other assets combined.

SNX has been the latest DeFi darling. The Synthetix Exchange only accepts its SNX token as collateral, which users stake to generate debt, much like in MakerDAO with ETH, but instead of generating Dai, any synthetic asset (with a price) can be minted.

There’s been a small controversary on whether or not Synthetix deserves its #2 spot on DeFi Pulse as most of the increase in TVL is because the price of SNX has nearly tripled in the past 3 months. No one would claim that SNX and ETH are collateral equals and TVL is only a tool for comparison.

SNX is the only non ETH asset that has gotten significant interest. Although lending Dai and USDC are viewed as DeFi services with mass market appeal, they combined represent just 6% of all DeFi TVL.

Ethereum is the bedrock of DeFi and will be the most important asset for DeFi for the foreseeable future, but DeFi projects need to diversify and also focus on creating opportunities for other idle assets. Obviously, Multi-Collateral Dai is a step in this direction.

Compound and Uniswap are the furthest ahead in this regard. For every asset added to Uniswap, there must be a corresponding amount in ETH contributed also, so ETH must be 50% of locked up assets.

The ETH locked up in Compound is earning interest, but it is minuscule. Presumably, ETH is locked in Compound in order to serve as collateral to borrow in other assets like a stablecoin. The same is true of the REP locked in Compound.

Compound’s most promising markets, however, are its USDC and Dai markets. Supply is probably a better metric than Total Value Locked up for lending protocols, but ether way, Compound is much more diversified than DeFi overall.

Compound pails in comparison to Uniswap. Uniswap has 25 assets that have at least $100k locked up in a Uniswap liquidity pool.

Identifying the next wave of assets to flow into DeFi is a bit like nailing jello to the wall. There is a clear on ramp from ETH holders, but this channel has close to dried up. Moving forward, growth is likely to be concentrated in stablecoins for lending and smaller tokens for trading liquidity pools.

Number of the week: DEX volume soars

DappRadar is out Amidst ETH’s slide, decentralized exchanges saw increased usage, particularly Kyber and Uniswap. Both saw $24m in volume over the last week. Dune Analytics has a great dashboard for DEX stats and tons of other tools to play around with.

Tweet of the Week: Uniswap as an Oracle

There are a myriad of attempts to solve the Oracle problem. Uniswap founder Hayden Adams argues that a manipulation resistant on chain market can serve as a 3rd party oracle. Good thread.

Video of the Week: Potential of Multi-Collateral Dai

Lou Kerner leads an all star panel on the implications of Multi-Collateral Dai. The recorded call features presentations by each of the participants before a broader panel discussion.

Odds and Ends

  • Synthetix launches DeFi-themed synths Link

  • Set Protocol announces Social Trading feature coming in 2020 Link

  • Stake Capital creates Stake DAO to track on-chain profits Link

  • Chai is a token that accrues interest from the Dai Savings Rate Link

  • Smart Contract wallet Argent offers free USD to USDC purchases Link

  • Polychain-backed Nuo Protocol profiled by Financial Express Link

  • Synthetix considers adding ETH as collateral Link

Thoughts and Prognostications

  • Anatomy of the $MKR market impact of a large CDP closure [Andrew Kang]

  • History of Kenya’s Mpesa and what it means for blockchain [Michael Kimani]

  • Network effects in an open financial world [Ivan Martinez]

  • An introduction to Network Value to Transactions ratio (NVT) [Santiment]

  • Validated: staking on eth2 [Carl Beekhuizen]

  • The strange tale of Quadriga [Vanity Fair]

Long Read of the Week: Vitalik 5 years later

“While the MakerDAO system has survived tough economic conditions in 2019, the conditions were by no means the toughest that could happen. In the past, Bitcoin has fallen by 75% over the course of two days; the same may happen to ether or any other collateral asset some day.”

Perspective is hard to come by in the crypto space. Vitalik has penned an excellent essay bringing perspective to a host of blockchain problems, from cryptography to economics. In the post, Vitalik revisits a 2014 blog post about the “hard problems in blockchain” and evaluates our progress.

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What do you think?

Evaluating the Explosive Growth in Synthetix