Amid the Uniswap frenzy, a look back at DeFi’s summer

By Ryan Todd

Translation: Li Hanbo

The digital asset industry is developing so rapidly that its development in a quarter can be compared with the development of the traditional technology industry in an entire year. The speed of iteration and development of DeFi this summer has stunned even the most low-key market participants.

In June, the total amount of funds "locked" in DeFi applications and protocols reached a historical high of US$1.2 billion, and the previous high was set before "312". According to DeFi Pulse data, in just three months since then, this number has now increased by more than 8 times .

Likewise, we’ve seen a breakout in various money markets (lending and borrowing) and DEX protocols. There are now over 450,000 unique addresses on DeFi protocols as well (Dune Analytics - Richard Chen). While unique users may have multiple addresses interacting with these protocols, this number has still more than doubled since June. Meanwhile, DEX volume reached a new all-time high in August, exceeding $11 billion — a sharp increase from July’s $4.4 billion. Even more impressively, the jump in DEX volume came at the expense of centralized exchanges , as the ratio of decentralized to centralized spot volume hit an all-time high of 6% in August (compared to 3.95% in July and 2.1% in June). Uniswap, the market leader based on average daily volume , even reached nearly $1 billion in total volume on September 1, surpassing Coinbase Pro’s total volume for the day.

As Steven Zheng noted last month, a trend of “Frakenstein code” emerged in August as projects copying the code sprang up across the DeFi space. New yield farming protocols followed three distinct themes: 1) using yield farming to incentivize capital formation, 2) using AMPL’s rebase feature to create a gamified “Ponzi economy” product to incentivize trading, and 3) using memes and food emojis to attract more attention.

The extraordinary growth in transaction volume and capital flow (usage) of these protocols has caused DeFi's "revenue" to grow parabolically this summer, as governance tokens and liquidity mining have flourished, siphoning protocol fees for protocol liquidity providers to incentivize broader capital formation in search of high returns. As of the first two weeks of September, DeFi protocol total revenue has exceeded US$80 million (source: Token Terminal), exceeding the entire cumulative transaction volume from January 2018 to July 2020!

So how did the DeFi field get to this point step by step? Let’s take a look at what happened in the DeFi market this summer .

This post helps organize some of the key noteworthy events in DeFi this summer, while highlighting previous research work from The Block on different protocols within DeFi.

Details about the protocol, important milestones, and additional research from The Block are listed chronologically starting with the timeline.

June-compound

The release of the COMP governance token is part of Compound’s efforts to gradually achieve decentralization by eliminating the risks posed by key players , allowing the Compound community to weigh in on protocol updates and monetize after a buffer period towards full decentralization.

According to the distribution schedule at the time, approximately 2,880 COMP were allocated to eight lending markets on Compound every day, including ETH, DAI, USDC, USDT, BAT, REP, WBTC, and ZRX. The amount of COMP received by each market is proportional to the interest accumulated in the market, and users earn corresponding COMP in real time based on their balance on Compound. Although Compound was originally pioneered by the now-bankrupt crypto exchange Fcoin, it is now widely believed in the community that Compound popularized the use of liquidity mining to issue its native token.

Notably, within a day of Compound token trading, the protocol captured the top spot in total value locked in all DeFi projects (June 20). At the time, this represented 32% of the total assets managed by the DeFi sector, according to DeFi Pulse. But it wouldn’t last. As of September 14, Compound is currently the 7th largest DeFi protocol by stored value, according to DeFi Pulse.

July - Balancer

Following the success of Compound and COMP, Balancer (n-dimensional automated market maker) launched its own liquidity mining program. On June 23, BAL token began trading on the Ethereum mainnet.

Balancer launched its liquidity mining program on June 1, allowing liquidity providers on the platform to start earning BAL by providing tokens to the protocol. At the time, the team made it clear that users would not actually receive their BAL until a few weeks later as it was still ironing out the final details of the BAL smart contract deployment.

Prior to the token launch, BAL had less than 70 independent liquidity providers (LPs) in total, however, the day after the token launch, this number jumped to over 436. As of September 14, BAL currently has over 1,400 LPs.

July - Nexus Mutual

Nexus Mutual was launched in May 2019 as a member-owned capital pool that provides insurance for smart contract bugs. The project token NXM uses a bonding curve to incentivize effective capital repurchases to the pool based on minimum capital requirements at any given time.

With the total value locked in DeFi now exceeding $8 billion, Nexus Mutual ’s insurance coverage has exceeded $120 million ( Nexus Tracker ) . It is worth noting that two months ago, Nexus Mutual’s coverage value was less than $10 million.

July - Yearn.Finance

At the beginning of 2020, yearn.finance was a simple protocol that aggregated different lending protocols (namely Compound, Aave, and dYdX) to optimize returns for users.

The initial version of the protocol has no tokens or even many features . Users deposit funds into a smart contract that analyzes the returns of various lending markets and then automatically rebalances funds to keep up with the best strategy.

In the past month, the platform's assets under management have grown from less than $10 million to more than $607.5 million. Launched on July 18, 2020, YFI's market cap grew from $0 to $295.5 million from July to August. Currently, its market cap is under $800 million.

August-Curve

Curve is an automated market maker platform for trading stable assets. The key feature behind Curve is that by changing the pricing formula for assets in its liquidity pool, Curve can provide smaller slippage for trades between assets that are relatively stable in price to each other (such as stablecoins) .

Curve has launched a pilot liquidity mining program with Synthetix and Ren Protocol, where liquidity pools that synthesize BTC on Ethereum can earn tokens. By providing wBTC, renBTC (Ren Protocol's BTC), or sBTC (Synthetix's BTC) to the Curve pool, users can earn REN, SNX, and CRV rewards. These rewards start on June 19 and last for ten weeks.

On August 14, the launch of the Curve (CRV) token seemed to be forced by the community , as an anonymous developer ran and deployed its smart contract in front of the Curve team without their knowledge.

Due to its sizeable stablecoin pool, Curve has become the platform of choice for many people who trade stablecoins and Bitcoin. This creates compounding opportunities for a small number of Curve pools.

Two days after its token launch, Curve became the third DeFi protocol to reach $1 billion in total value locked. Currently, as of September 14, it is exactly at the $1 billion level.

August - Yam Finance

Yam is a Frankenstein project inspired by a range of DeFi projects such as Ampleforth, Compound, Synthetix, and yEarn. The Yam project exceeded ~$600 million in total value locked (in unaudited contracts) one day after the project was announced.

Yam looks similar to Ampleforth (a price-elastic currency whose supply adjusts based on demand), but with the caveat that after the protocol performs an aggressive rebase (see: expanding its supply), it will use a portion of that supply to purchase yCRV, a basket of yield-generating stablecoins on the Curve protocol.

Two days later, the project would fail due to a buyback bug that the team was unable to fix, causing the market value of each YAM to drop to zero and a net loss of approximately $750,000 in funds as yCRV tokens were locked forever.

But then, Yam Finance set up Gitcoin donations and coordinated the community to fund an audit of the Yam contract to support the launch of Yam 2.0.

August - Aave

Decentralized money market protocol Aave surpassed MakerDAO to take the number one spot in total value locked (TVL) on August 25. Currently, it still holds the largest USD asset value as of today (September 14).

After becoming the leader in peer-to-peer lending models, the Ethereum-based money market protocol continues to grow its market share at an astonishing rate.

September — Uniswap to SushiSwap

SushiSwap is a fork of Uniswap v2, initiated by an anonymous developer who introduced a governance token called SUSHI. If liquidity providers (LPs) stake Uniswap LPtokens, they can earn these tokens and then eventually provide liquidity on SushiSwap.

In Uniswap, LPs earn 0.3% of transaction fees in any pool, which are distributed proportionally to all LPs in each pool. SushiSwap has gained a lot of liquidity since its launch on August 28. In 3 days, its total value locked grew to more than $700 million .

Since then, more than $1 billion worth of Uniswap LPtokens have been staked in the first week to continue harvesting SUSHI tokens. Although the expected result of SushiSwap is to absorb Uniswap's liquidity in the long term, in the first week of SUSHI's liquidity mining program, Uniswap's liquidity has risen from $300 million to nearly $2 billion.

On September 9, Sushiwap successfully migrated more than $800 million of Uniswap's liquidity to its contracts. Although this initially caused Uniswap's liquidity to drop by nearly 60%, since SushiSwap cancelled its higher liquidity incentives, Uniswap's liquidity has swelled to over $1 billion, while Sushi's liquidity has returned to below $1 billion. Judging from the transaction usage of the two platforms, Sushi's average transaction volume in the past 5 days is close to $200 million, and Uniswap's average daily transaction volume is about $372 million.