From mining, forks to aggregators, learn about the evolution of DeFi in one article

(Starry Night, Vincent van Gogh)

After more than two years of dormancy, DeFi exploded in the summer of 2020. From mid-June to now, only three months have passed, and the various intensive evolutions are dazzling. This is the most intensive stage of innovation in the history of encryption so far.

Mining

*In the DeFi field, Synthetix is ​​the originator of liquidity mining.

Synthetix initially provided SNX token incentives to users who provided liquidity to the sUSD pool on Curve. That is to say, on Curve, users who provided liquidity to the sUSD pool could receive corresponding SNX rewards according to their proportion. Later, it also cooperated with projects such as renbtc to conduct joint liquidity mining.

Why does Synthetix engage in liquidity mining? Because Synthetix is ​​a protocol for the generation and trading of synthetic assets. If there is no liquidity, its synthetic assets are meaningless. Therefore, whether it is sUSD, sBTC, sETH, etc., it needs liquidity and people to trade in order to develop.

How to guide liquidity is not enough to rely on one's own internal system, and guiding it through other DEX platforms is also a good method. This is an important reason why Synthetix successfully promoted its liquidity by using the Curve platform.

*Bitcoin is the ancestor of mining in the crypto space.

When it comes to mining, Bitcoin is indispensable. Bitcoin is the first token in the encryption field and the first cryptocurrency to introduce a mining mechanism.

Bitcoin introduced the mining mechanism for the security of its network. Mining solves the problems of bookkeeping rights and token incentives, and also solves the security problem at the same time. This is a very clever game mechanism design. Only by participating in mining can you get rewards. Mining is also the distribution mechanism of Bitcoin. It realizes its value storage and value circulation through the model of rewarding each block and halving every four years, becoming the first successful crypto native token and the real "digital gold".

Bitcoin mining introduces computing and energy. This gives Bitcoin its intrinsic value. Today's DeFi mining often involves staking assets and then receiving corresponding rewards. Why doesn't DeFi engage in this kind of PoW computing power mining? There are many reasons, but one of them is that the PoW mechanism has helped the entire crypto field complete the most basic accumulation of native assets, among which Bitcoin is currently worth more than $200 billion and Ethereum is currently worth more than $40 billion. These are the most important and secure assets in the crypto field, and they are all generated through the PoW mechanism, which is equivalent to completing the most important first step in building crypto asset Lego, that is, the process from 0 to 1.

On this basis, PoS came into being. Because of these native crypto assets, many other assets have been derived from native crypto assets. Most of today's DeFi obtains token distribution through staking assets. This is possible because Bitcoin and Ethereum have paved the way for today's situation.

In the English discourse system, mining has become "Yield Farming", which has become the sowing and cultivation of profits. In this discourse, funds are regarded as seeds of crops, sown in different lands, and then harvested. The reason behind this is that both the seeds and the land are already prepared.

*Compound and Balancer are the enablers of liquidity mining.

Although there has been the successful experiment of Synthetix, the accumulation of Bitcoin, and the smart contract platform of Ethereum, the detonating point in the DeFi field comes from the liquidity mining of Compound and Balancer, which is also the natural result of the industry's accumulation.

Compound started liquidity mining on June 15th. After its launch, it exploded instantly, and its locked assets once exceeded 1 billion US dollars. Even when liquidity mining was flourishing, its locked assets still exceeded 700 million US dollars.

COMP is Compound's governance token, an ERC20 token that allows holders to delegate tokens to others for voting. Any token holder can participate in Compound's governance. As long as you own 1% of the delegated tokens, you can initiate governance proposals, including adding new assets, changing the parameters or variables of various protocols such as interest rate models. COMP is not only a governance token, but also a token that captures the value of its business. All borrowers and lenders on Compound have the opportunity to receive COMP token allocations. The total number of tokens allocated for mining is 4,229,949. 50% of the tokens are allocated to lenders and 50% of the tokens are allocated to borrowers. The higher the price of COMP, the stronger the motivation for users to save and borrow money.

Blue Fox Notes has been paying attention to Balancer for a long time. Before it launched liquidity mining, its liquidity was less than 20 million US dollars. Now Balancer's liquidity exceeds 480 million US dollars. Balancer's liquidity token pool has an adjustable weight factor, which can achieve a fairer token distribution through weight adjustment.

(Liquidity mining has pushed up the amount of locked assets on Balancer and completed its business cold start, DeFiPulse)

Mining + Fork

*YAM is the originator of mining + fork.

When AMPL came out, there were some imitators, but none of them caused a sensation in the crypto community. But YAM is different, it stirred up the entire crypto community.

Why is YAM so attractive?

YAM is also a fork of AMPL, but it has added a few new features such as the reserve library. One of the important reasons why YAM was able to detonate the community was that it combined the AMPL+YFI mechanism. YAM is a variant of AMPL, but at the same time its issuance mechanism adopts the YFI model. In other words, YAM combines the most detonating things of AMPL and YFI. Therefore, as soon as it appeared, it burst out with energy.

*Sushiwap is the driving force behind this trend.

In the field of DeFi, DEX is the largest battlefield. The previous top three were Uniswap, Balancer, and Curve. In addition, there are more than a dozen DEXs with daily trading volume exceeding 10 million US dollars. The trading volume of DEX is getting bigger and bigger, and in fact it has become the future rival of CEX.

Sushiswap is a project that pushes the fork + mining trend to the highest level. Because Sushiwap not only forked Uniswap, but also added a token distribution mechanism for mining, and finally tried to drain Uniswap's liquidity. The thirteen token pools that participated in Sushiswap mining in the early days, including stablecoin token pools such as USDT, USDC, DAI, and mainstream DeFi token pools, are all the pools with the highest liquidity on Uniswap.

In order to stabilize its liquidity, Uniswap launched the UNI token and launched a mining plan for four pools, including three stablecoin pools and one WBTC pool. Uniswap's counterattack was brilliant, but Sushiswap still retained $500 million in liquidity, and now the mining income on Sushiswap is almost the same as that of the Uniswap mining pool. Uniswap did not show a comprehensive crushing advantage over Sushiswap, and a relatively balanced mining income situation appeared in the DeFi field.

*Fork + liquidity mining has a diminishing effect

Although various fork + liquidity mining projects emerge in an endless stream, if they are simply crudely imitated, they are basically unsustainable. This can be seen from the various "food swaps" that imitate Sushiswap, and the final result is often a death spiral.

(The plunge caused heavy losses to most mining participants in Pool 1 and Pool 2, DeFiPulse)

Mining + Fork + Micro-Innovation

As time goes by, there will be more and more micro-innovations in liquidity mining. These projects may not be big, but because they have small changes, perhaps some new developments will emerge in continuous iterations. Pickle has begun to have some small creativity and presents something different.

Pickle's goal is very simple and focused: to make the de-anchored stablecoins (DAI, USDT, USDC, sUSD) closer to their anchor prices. Pickle is an experimental protocol that uses liquidity mining incentives, treasury, and governance methods to achieve the goal of bringing stablecoins closer to their anchor prices.

Recently, Pickle has been continuously launching aggregate mining of cucumber cans (pJars) in an attempt to give value to PICKLE tokens, rather than being unable to retain liquidity under a crude mining allocation mechanism like the previous "food swap". Pickle's cucumber cans are similar to YFI's yVault. There are currently 4 aggregate mining pools, pJar0.69a\b\c and pJar0, with locked assets exceeding US$70 million. However, since the contract is not involved, participation should be cautious.

(Pickle tries to add value to the protocol by doing more things to retain liquidity)

In addition to Pickle, Safe is also a new attempt to combine insurance purchase with mining. However, this also leads to some side effects. Since many users buy insurance for mining, users who normally want to buy insurance cannot buy insurance at a certain time. This also shows that the insurance track is in urgent need of new practitioners.

The integration of DeFi and NFT

Recently, there is a MEME token. At the time of writing this article, its market value is over 29 million US dollars, and there are a total of 28,000 MEME tokens. The interesting thing about this project is that it combines NFT and DeFi.

Meme is also a mining project, but it does not mine tokens. Instead, it earns limited edition NFTs by staking assets. In short, Meme is a decentralized NFT mining protocol.

Currently, Meme has two mining pools, one is to deposit ETH/MEME LP tokens on Uniswap to mine NFTs on LP Genesis, and the other is to deposit MEME tokens to mine NFTs on Genesis.

In the Genesis Pool, after each MEME token is deposited into the Genesis Pool, one MEME coin can earn 1 pineapple point per day, up to a maximum of 5 points. When there are enough pineapple points, they can be exchanged for NFTs.

In the Genesis LP pool, users can also earn Pineapple Points by staking MEME/ETH LP tokens on Uniswap. The amount of Pineapple Points earned depends on the amount staked by the user, and up to 5 Pineapple Points can be earned per day.

When users earn enough pineapple points, they can choose their favorite NFT to redeem.

(NFT on Meme, Van Gogh)

The scalability of Meme lies in that it can become a platform for generating various NFTs. At present, its NFTs mainly focus on some Memes in the crypto field, such as the founder of Ethereum, the founder of YFI, the founder of Chinalink, etc. In the future, it can continue to expand to NFTs in more fields, thereby generating more mining and more NFT transactions.

(NFTs on Meme are sold on Opensea)

As long as the NFT field can continue, it has a chance to survive. Of course, if the NFT market cools down, it will also be affected. Relatively speaking, this is a market that is more affected by speculation.

In addition, Aavegotchi is also a project that combines NFT+DeFi. It generates NFT collections by staking DeFi assets. The properties of its NFT depend on its value and rarity in the Aavegotchi universe, such as different collateral rights, traits, and wearable equipment. Today's Aavegotchi is like CryptoKitties or Axie Infinity with DeFi collateral assets. This makes NFT not only collectible, but also has intrinsic underlying asset value.

Each Aavegotchi NFT manages an escrow contract address, which holds ERC20 collateral backed by Aave, also known as atoken. Atokens are generated through Aave's lending pool and can generate income. The atokens in the Aavegotchi escrow address will increase over time.

Basic advantages of the underlying protocol

Forking and mining are techniques, not principles. Due to the composability of DeFi, the previously built underlying protocol becomes the basis for the new protocol, which will further strengthen the advantages of the underlying protocol.

As we can see, Uniswap not only survived the attack of Sushiswap, but also helped it grow. One of the reasons is that it has become a Lego building block for other mining projects to obtain liquidity. In addition to DEX, lending protocols, synthetic asset protocols, etc. will gradually benefit from the great development of DeFi. Just like Nexus Mutual also benefited from the aggregation protocol and the recent mining boom.

Therefore, the underlying protocols are the foundational Lego blocks that are not replaced but are continually enhanced with forking + mining + aggregation.

The Possibility of Aggregators

In the Internet era, aggregators capture the vast majority of value. Google aggregates the content of various websites, Facebook aggregates social relationships and content, Amazon aggregates goods and transactions, Airbnb aggregates rooms... These technology giants have subverted traditional industries and established a near-monopoly position.

Why do these tech giants form a near-monopoly? As more and more users, content, and goods are aggregated, their costs will not increase, but will only be diluted, and a network effect will be formed on this basis. This is a huge moat, and the result is a winner-takes-all situation. Will there be an aggregation effect similar to that of the Internet era in the DeFi field? We don't know yet, but DeFi aggregators have already demonstrated their power.

*Aggregators are cold, ruthless revenue machines.

Aggregators take advantage of the composability and permissionlessness of DeFi, constantly looking for better profit strategies to help users increase their income. One of the most typical cases is YFI’s yvaut, which is an aggregator that improves mining income.

*Aggregators are the distribution hubs for DeFi funds.

Whether it is liquidity mining, staking, lending, or AMM of DEX, the essence is to deposit tokens into the storage pool and then earn income. This means that whoever has higher income is likely to siphon more tokens. Now there are lending, DEX, derivatives protocols and aggregators that attract tokens, and finally the staking of various tokens themselves. These protocols seem to be in different fields, but in essence, they have a certain degree of competition. The underlying protocol is the basis for generating income, and the aggregator is responsible for optimizing the income, and eventually a balance will be reached. From the perspective of user operation, aggregators are more in line with their interests, more flexible, and better income.

Of course, aggregators also have higher risks because aggregators involve more protocols. Once a risk occurs in one of the protocols, the high returns will not be worth the loss. In the early stage, aggregators are more suitable for users with higher risk appetite.

*Aggregators are the entry point to upgrading the DeFi experience.

DeFi is in a very niche stage, and a very important reason is that the current user threshold is very high. For most users, to use DeFi, they need to face the wallet registration, wallet key management, wallet and protocol interaction, and then involve more complex interactions such as lending, trading, mining, synthetic assets, etc. Various arbitrage strategies and mining strategies are too difficult for ordinary users.

These operations may not be a big deal for core players, but they are a headache for large-scale ordinary users. If you want ordinary users to participate in DeFi, these are the problems that need to be solved.

Not only is the threshold for user experience high, but DeFi projects are also developing very fast. Even core DeFi users can hardly keep up with the pace, let alone ordinary users. For example, in the recent liquidity mining projects, there are fresh "fruits and vegetables" coming out every day. Ordinary users have no idea where to start and don't know how to choose.

Not only are the usage and selection thresholds high, but the fee threshold is also high. During the peak period of mining, the fees of hundreds of dollars are unbearable for ordinary users.

Finally, what is even more frightening for ordinary users is that they are unaware of the potential risks, which may lead to significant losses.

In short, the DeFi field is currently on the eve of explosive development. There is a need for a DeFi aggregator that can be used by both ordinary users and advanced users. It can give users direction and allow users to participate in DeFi more conveniently without worrying about complex operations, high fees, selection, security and other issues.

The battle between DeFi and public chains

*ETH 2.0 will further enhance its advantages

With the arrival of ETH2.0, the congestion problem on Ethereum will be alleviated to a certain extent, which will further consolidate its advantages due to its inherent ecological advantages.

*Public chains such as Polkadot, Cosmos, and Solana have begun to develop their own DeFi ecosystems and will also develop their own small ecosystems.

At present, there are more than ten DeFi projects on Polkadot, and the overall ecological projects are about 200, and the basic construction of the ecology has been initially completed. Cosmos is also developing, and some DeFi trading projects and stablecoin projects are also developing. Solana has also begun to build DEX, such as Serum. If it can prove itself, then there will be many opportunities for expansion in the future. In addition, various other public chains will also develop their own DeFi and realize cross-chain asset circulation on this basis.

Therefore, there will be some good projects in the cross-chain asset field in the future.

*Establishing a multi-chain coexistence ecosystem centered on Ethereum

Ultimately, with the development of cross-chain assets, Ethereum's DeFi ecosystem will continue to strengthen, and other public chains will also have the opportunity to gain a certain market size. Since the overall DeFi market size is still small, these public chains have the opportunity to develop DeFi together. In the future, it is more likely that a multi-chain coexisting DeFi ecosystem centered on Ethereum will be formed.

Layer2 Development

DeFi has exposed the shortcomings of Ethereum in terms of high fees and low throughput, but it is not a bad thing. On the one hand, it fully demonstrates the existence and scale of demand. It would be a bad thing if there was no congestion. On the other hand, it will also prompt the backbone of the entire crypto field to work hard to find solutions. For layer 2, please refer to the previous article "Ethereum's Layer 2 Track" by Blue Fox Notes.

These include state channels, side chains, Plasma, Optimistic Rollups, Validium, Zk Rollups, etc. These solutions have made certain balances at different levels. Some have made certain compromises in security, some have made certain compromises in availability, and some have made certain compromises in throughput. But they have all promoted the development of Layer 2 to varying degrees. Nowadays, more and more projects are adopting Layer 2, and we may see many DeFi projects based on Layer 2 in the future.