Wrap-up of DeFi topics that matter
Wrap-up of DeFi topics that matter
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As the bull market seems to be well underway, are there already signs indicating a top signal?
The recent breakthrough of Ethena Labs' USDe, a yield-bearing dollar-indexed token, generating strong performance (up to 40% annual APY) looks like Luna's UST and its 20% yield on Mirror during the last bullrun.
Should we be concerned?
Answers are given below.
In a nutshell
Liquid staking TVL overtook the $40B threshold this week (+$1.8B), but ETH LS yield highly decreased to 3.15% while SOL LS yield maintained the 8% threshold.
The highest increase in TVL increases is that of the DEXs (+20%) to $7.9Bn. Lending and DEX APYs also increased a lot, resp. 11.4% and 8.3% for stable pools.
Bridges TVL continue its surprising growth by going up of another 10% to $337M.
Bridges, Yield, Treasuries and Private credit categories maintained the same level of APY than last week. A not so frequent yield stability in crypto market.
The Ethena Labs case
Ethena Labs has shaken up the DeFi world in the past two weeks.
With over 400 million USDe tokens minted, supported by an initial yield of over 40% annually (now 15%), USDe stands out as it is marketed as a yield-bearing stablecoin.
Are we looking at a token similar to Luna's UST and its 20% yield on Mirror? The verdict just below.
How USDe works
USDe works as a tokenised arbitrage strategies.
For every dollar deposited to minth USDe, it creates a hedged position (hold spot stETH, sell perpetuals ETH) that generates yield from both legs.
Uniswap Fee Switch
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Subscribed
The UNI token, a top DeFi governance token but now mostly known for its limited usecases, is getting a reboot.
The Uniswap Foundation wants to flip the fee switch according to a recent proposal.
Basically, they're suggesting that a chunk of the profits made by Uniswap's liquidity providers (about 5 to 15%) should go back to UNI token holders.
If Uniswap adopts this change across the all the pools collecting fees, with current trading volume, and a 50% stake rate,
Hot takes with Martin from Mountain Protocol
In this new interview, I am pleased to welcome Martin Garrica.
Other contenders: Marinade, Jito, Stader, Ankr, Stafi
Other contenders: Solend, Kamino, Benqi, Notional, Ajna.
Other contenders: Interport
Other contenders: Orca, Raydium, Aerodrome, Trader Joe, Maverick, Quickswap.
New protocols to look at: Swaap, Maverick.
Other contenders: Maple, Swarm, Hashnote.
Other contenders: Clearpool.
Other contenders: Origin, Aura, Cian, Arrakis, Gamma.
New protocols to look at: Bunni, JonesDao.
As the bull market seems to be well underway, are there already signs indicating a top signal?
The recent breakthrough of Ethena Labs' USDe, a yield-bearing dollar-indexed token, generating strong performance (up to 40% annual APY) looks like Luna's UST and its 20% yield on Mirror during the last bullrun.
Should we be concerned?
Answers are given below.
In a nutshell
Liquid staking TVL overtook the $40B threshold this week (+$1.8B), but ETH LS yield highly decreased to 3.15% while SOL LS yield maintained the 8% threshold.
The highest increase in TVL increases is that of the DEXs (+20%) to $7.9Bn. Lending and DEX APYs also increased a lot, resp. 11.4% and 8.3% for stable pools.
Bridges TVL continue its surprising growth by going up of another 10% to $337M.
Bridges, Yield, Treasuries and Private credit categories maintained the same level of APY than last week. A not so frequent yield stability in crypto market.
The Ethena Labs case
Ethena Labs has shaken up the DeFi world in the past two weeks.
With over 400 million USDe tokens minted, supported by an initial yield of over 40% annually (now 15%), USDe stands out as it is marketed as a yield-bearing stablecoin.
Are we looking at a token similar to Luna's UST and its 20% yield on Mirror? The verdict just below.
How USDe works
USDe works as a tokenised arbitrage strategies.
For every dollar deposited to minth USDe, it creates a hedged position (hold spot stETH, sell perpetuals ETH) that generates yield from both legs.
Uniswap Fee Switch
Thanks for reading Weekly DeFi Report by Octave! Subscribe for free to receive new posts and support my work.
Subscribed
The UNI token, a top DeFi governance token but now mostly known for its limited usecases, is getting a reboot.
The Uniswap Foundation wants to flip the fee switch according to a recent proposal.
Basically, they're suggesting that a chunk of the profits made by Uniswap's liquidity providers (about 5 to 15%) should go back to UNI token holders.
If Uniswap adopts this change across the all the pools collecting fees, with current trading volume, and a 50% stake rate,
Hot takes with Martin from Mountain Protocol
In this new interview, I am pleased to welcome Martin Garrica.
Other contenders: Marinade, Jito, Stader, Ankr, Stafi
Other contenders: Solend, Kamino, Benqi, Notional, Ajna.
Other contenders: Interport
Other contenders: Orca, Raydium, Aerodrome, Trader Joe, Maverick, Quickswap.
New protocols to look at: Swaap, Maverick.
Other contenders: Maple, Swarm, Hashnote.
Other contenders: Clearpool.
Other contenders: Origin, Aura, Cian, Arrakis, Gamma.
New protocols to look at: Bunni, JonesDao.
Historical funding rate figures.
Until now, nothing is weird. USDe yield does not come from nowhere.
It USDe a scam?
No, USDe is not a scam.
It is a tokenised financial strategy that do not carry an infinite downard spiral risk like Luna’s UST.
USDe is backed by external collateral that could be redeemed, it was not the case for UST or any other algo stablecoin.
Can USDe fails (i.e. make investors lose money)?
Yes USDe can fail, but in a limited extent.
The least favorable scenario is one when the ETH perpetual funding rates are negative for a period long enough to cause full depletion of the insurance fund (i.e. a financial cushion held by Ethena Labs) and USDe holders getting negative yield during this period.
But even in this scenario with negative funding rates equal to those from the UST collapse period maintained for six month, losses for USDe holders would be limited to 3 to 4% of their principals according to Chaos Labs.
What are the others limitation to USDe?
First, USDe is not a stablecoin and should never be considered as such.
Everyone considering to buy USDe should realise this is not a stablecoin, nor a yield-bearing stablecoin but a tokenised sophisticated financial strategy, that would typically appears in the Yield vertical of this DeFi weekly report.
Also, USDe can face a scaling issue.
Essentially, the open interest on centralized exchanges (CEX) for ETH perps constitutes their total addressable market (TAM).
OI on major CEXes
The ETH perpetuals market size is currently standing at $5 billions in open interests (max cap) for the top major CEXes.
It implies that with a USDe market cap exceeding $1 billion (i.e. 20% share of the total market), the funding rates would be significantly altered, as short ETH perpetuals demand becoming significant, potentially rendering the strategy obsolete.
Lastly, USDe collateral (dollars) is dependent on centralised actors as they leverage custodians (Ceffu, Cobo and Fireblocks among others) and CEXes with the unrealised PNL of ongoing arbitrage strategies.
If you want to enter into more details, I highly recommend to read this comprehensive thread by Chaos Labs.
If you have any other points you’d like to know, happy to discuss them in DMs.
It might not sound like much, but this move carries two important messages in the DeFi world:
Tokens like UNI can have a real financial role. This has already been tested by other platforms like DYDX.
Uniswap Foundation isn't scared of potential legal issues in the US because of this decision and it could lead other protocols to take a similar path with their governance tokens.
Martin is the founder of Mountain Protocol, issuer of the USDM.
Excluding sDAI, USDM is the most capitalized yield-bearing stablecoin, and Mountain is the second yield-bearing RWA protocol behind Ondo (combining USDY and OUSG).
While it has been on mainnet for about six months, relatively recently compared to other yield-bearing stablecoins, what explains its success and, more importantly, how high can USDM go?
I tried to have some answers by asking the following questions to Martin.
What differentiates USDM from other tokenized tbills tokens? (USDY from Ondo, USYC from Hashnote, STBT from Matrixdock) What’s the secret sauce to USDM adoption by DeFi market?
In the story of the rabbit and the turtle, Mountain Protocol is the turtle. Although we started working in 2022, we took the long (but IMHO correct path) of being a regulated financial institution. This allows us to offer a prudentially regulated payment token which better matches the experience most users look for in stablecoins.
Some of these are: permissionless transfers and fast mint/redeem with no fees.
DeFi yield lending rates are higher than 10% today, is it still important to look at the tbills-based markets?
Stablecoins have shown product market fit in low and high interest rate environments. USDM is a better stablecoin, so as long as stablecoins are needed, USDM has a place.
In our view, stablecoins will continue to grow to $1T in market cap in the coming 2-3 years. For that to happen, we need to bring institutions.
Institutions are not going to be paying 3-5% APY in opportunity cost for being on-chain, so unless we solve this, we won’t get the big-size volumes on-chain.
What is the most plausible scenario for Mountain to reach $1B TVL?
We aim to get to $1B by end of 2024. We are working to further integrate USDM into DeFi, as well as becoming an early deployer on emerging blockchains.
We are also excited about real world use cases, from FX to using USDM for escrow collateralized loans in emerging markets.
Apart from yours, which DeFi vertical excites you the most?
It is hard to see all of Finance NOT coming fully on-chain.
I like Robert Leshner’s work at Superstate getting RWA on-chain and using Compound to go after the $700B margin loan TradFi market.
If you want to know more about fantastic Martin’s journey towards building the most ubiquitous yield-bearing stablecoin, you can reach out to me on telegram.
Historical funding rate figures.
Until now, nothing is weird. USDe yield does not come from nowhere.
It USDe a scam?
No, USDe is not a scam.
It is a tokenised financial strategy that do not carry an infinite downard spiral risk like Luna’s UST.
USDe is backed by external collateral that could be redeemed, it was not the case for UST or any other algo stablecoin.
Can USDe fails (i.e. make investors lose money)?
Yes USDe can fail, but in a limited extent.
The least favorable scenario is one when the ETH perpetual funding rates are negative for a period long enough to cause full depletion of the insurance fund (i.e. a financial cushion held by Ethena Labs) and USDe holders getting negative yield during this period.
But even in this scenario with negative funding rates equal to those from the UST collapse period maintained for six month, losses for USDe holders would be limited to 3 to 4% of their principals according to Chaos Labs.
What are the others limitation to USDe?
First, USDe is not a stablecoin and should never be considered as such.
Everyone considering to buy USDe should realise this is not a stablecoin, nor a yield-bearing stablecoin but a tokenised sophisticated financial strategy, that would typically appears in the Yield vertical of this DeFi weekly report.
Also, USDe can face a scaling issue.
Essentially, the open interest on centralized exchanges (CEX) for ETH perps constitutes their total addressable market (TAM).
OI on major CEXes
The ETH perpetuals market size is currently standing at $5 billions in open interests (max cap) for the top major CEXes.
It implies that with a USDe market cap exceeding $1 billion (i.e. 20% share of the total market), the funding rates would be significantly altered, as short ETH perpetuals demand becoming significant, potentially rendering the strategy obsolete.
Lastly, USDe collateral (dollars) is dependent on centralised actors as they leverage custodians (Ceffu, Cobo and Fireblocks among others) and CEXes with the unrealised PNL of ongoing arbitrage strategies.
If you want to enter into more details, I highly recommend to read this comprehensive thread by Chaos Labs.
If you have any other points you’d like to know, happy to discuss them in DMs.
It might not sound like much, but this move carries two important messages in the DeFi world:
Tokens like UNI can have a real financial role. This has already been tested by other platforms like DYDX.
Uniswap Foundation isn't scared of potential legal issues in the US because of this decision and it could lead other protocols to take a similar path with their governance tokens.
Martin is the founder of Mountain Protocol, issuer of the USDM.
Excluding sDAI, USDM is the most capitalized yield-bearing stablecoin, and Mountain is the second yield-bearing RWA protocol behind Ondo (combining USDY and OUSG).
While it has been on mainnet for about six months, relatively recently compared to other yield-bearing stablecoins, what explains its success and, more importantly, how high can USDM go?
I tried to have some answers by asking the following questions to Martin.
What differentiates USDM from other tokenized tbills tokens? (USDY from Ondo, USYC from Hashnote, STBT from Matrixdock) What’s the secret sauce to USDM adoption by DeFi market?
In the story of the rabbit and the turtle, Mountain Protocol is the turtle. Although we started working in 2022, we took the long (but IMHO correct path) of being a regulated financial institution. This allows us to offer a prudentially regulated payment token which better matches the experience most users look for in stablecoins.
Some of these are: permissionless transfers and fast mint/redeem with no fees.
DeFi yield lending rates are higher than 10% today, is it still important to look at the tbills-based markets?
Stablecoins have shown product market fit in low and high interest rate environments. USDM is a better stablecoin, so as long as stablecoins are needed, USDM has a place.
In our view, stablecoins will continue to grow to $1T in market cap in the coming 2-3 years. For that to happen, we need to bring institutions.
Institutions are not going to be paying 3-5% APY in opportunity cost for being on-chain, so unless we solve this, we won’t get the big-size volumes on-chain.
What is the most plausible scenario for Mountain to reach $1B TVL?
We aim to get to $1B by end of 2024. We are working to further integrate USDM into DeFi, as well as becoming an early deployer on emerging blockchains.
We are also excited about real world use cases, from FX to using USDM for escrow collateralized loans in emerging markets.
Apart from yours, which DeFi vertical excites you the most?
It is hard to see all of Finance NOT coming fully on-chain.
I like Robert Leshner’s work at Superstate getting RWA on-chain and using Compound to go after the $700B margin loan TradFi market.
If you want to know more about fantastic Martin’s journey towards building the most ubiquitous yield-bearing stablecoin, you can reach out to me on telegram.
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