Ethereum DeFi defined three trends in the third quarter of 2020:
1) The Rise of Automated Market Makers (AMMs)
2) Governance tokens and income farming
3) forks, derivatives and network effects
4) and “weird DeFi”.
The rise of automated market makers (AMMs)
The tendency: While stable coins and credit platforms have long been the centers of activity in the DeFi ecosystem, the third quarter has created a number of new, compelling business models for decentralized exchange (DEX). Since the launch of Ethereum, there have been a variety of ways to exchange tokens – from the more traditional order book methods to token-based models. It is clear that DEXes have certain security and price advantages over their centralized counterparts. It was only in the third quarter of 2020 that it was really possible to say that a decentralized exchange had occurred. In September, Uniswap’s trading volume was $ 15.4 billion, nearly $ 2 billion more than Coinbase’s in the same month. DEXs that use automated market maker software (AMMs) now make up 93% of the market for decentralized exchanges. While Uniswap, Curve and Balancer are still some of the largest AMMs, a whole new group of DeFi companies emerged in the last quarter. In the third quarter, some of these new companies tried different approaches to create optimal prices for exchanging tokens and avoid volatile losses.
The importance: AMM platforms were able to generate three results simultaneously this quarter. They have worked to quickly increase liquidity for hundreds of different pairs of tokens, provide a robust decentralized option for exchanges between tokens, and serve a wider community of people who are adding liquidity to an exchange by providing them with new governance strategies. Reward tokens. These new tokens – in some cases as economic stakes or voting rights – are an important invention that only Ethereum offers. For example, users who deposit USDC into Curve receive cUSDC in exchange, which increases in value over time as the user charges trading fees. The success of AMMs in the third quarter proved that AMMs were ready for the mainstream – so much so that the total value of AMMs on Ethereum topped $ 4 billion. Instead of Wall Street market makers or centralized cryptocurrency exchanges taking the lion’s share of trading fees, AMMs granted returns and voting rights to anyone willing to add liquidity to a contract, whether scrutinized or not. Before, when did a borrower earn a return on a debt from their lender?
Governance tokens and income farming
The tendency: Following the release of Compound Finance’s $ COMP token in the second quarter, we expected the governance token proliferation to continue to expand in the third quarter. We also expected these launches to be used in part to incentivize liquidity in DeFi protocols and to give token holders the power to vote on changes to protocol designs. Yield farming, a new concept in the third quarter, can be described as a way to find the greatest reward for executing various Ethereum assets. With each use of different strategies and different levels of success, $ BAL, $ CRV, $ UNI, $ YFI, and others were launched in the third quarter.
The importance: Income farming incentives to generate governance tokens donated and took advantage of some of Ethereum’s more unique properties. As income farmers shifted liquidity to different pools for income, a strong speculative DeFi bull market generated rapid and high demand for new types of governance tokens and pushed Ethereum’s gas costs to an all-time high. Similarly, governance tokens like Uniswap’s $ UNI introduced a new model to get started by assigning $ UNI tokens to every Ethereum account that had previously interacted with the 400 protocol. While the summer caused a frantic rise and fall in various revenue opportunities, we predict it will be new inventions to reward those who provide liquidity to stick with it. This is particularly likely as the user experience improves, key management becomes more decentralized, and people who provide liquidity can earn more attractive interest rates than a bank account or legacy asset.
Forks, derivatives and a growing network
The tendency: This quarter also wasn’t without a host of forks, copycats, and (most importantly) meme-based tokens trying to capitalize on the popularity of AMMs and productive agriculture. SushiSwap and CREAM were introduced as forks by Uniswap and Compound. The details and data surrounding these forks have shown how network effects, community popularity, and even the nature of open source software are unique to DeFi.
The importance: Everyone’s potential ability to fork and duplicate open source code has long been a concern and subject of game theory analysis in the Ethereum and DeFi communities. The argument against the perceived drawbacks of public code was the resilience of network effects, which theoretically serve as protection against a protocol in which all users are suddenly lost to an identical competitor. SushiSwap was introduced as a fork by Uniswap and CREAM as a fork by Compound. In some cases, these forks have provided new mathematical models to protect against inconsistent losses and slippage in trading pairs. However, their varying degrees of success highlighted the negative side effects that left some developers and networkers feeling burned. This opens a critical discussion and raises questions about the legitimacy of anonymous token founders and, more generally, questions the ethics of using imitative code for personal gain.
The tendency: In addition to creating financial logs, DeFi began adding memetic internet culture to the lexicon. Interest rate maximization (i.e., crop farming) speculation has largely been fueled by conversations on social media and chat channels such as Twitter, Telegram, and Discord. It is impossible to overestimate the rapid pace of DeFi activity in the third quarter and the role these social channels play in driving much of it. Particularly noteworthy is the concept of ‘Weird Twitter’: a subset of social media full of absurd humor and internet subculture. This approach was carried over to DeFi as projects such as Based.Money and Meme Protocol (“Don’t Buy $ MEME”) became increasingly popular with crypto influencers. The speculators called themselves “degen” investors, took very risky bets on anonymous new forks and protocols and exposed themselves to 1000% returns as well as fraud and large losses or “carpet pulls”.
ConsenSys’s Jordan Lyall joked a picture of the DeFi project generator on Twitter and accidentally launched the meme protocol, which has a market cap of over $ 5 million less than three months later.
The importance: While the trend may seem absurd, we note that internet culture and crypto assets have long been linked, both in terms of business philosophy and community diffusion. As investors began to think of financial activity as a game, the result created protocols that combined money with visual imagery and self-referential humor. This in turn led to the creation of projects using financial mechanisms such as asset collateralization for a
synthetic return to earn collectable social assets like pictures, cards, and other non-fungible tokens. As a result, crypto-art tokens known as non-fungible tokens, or NFTs (ERC-721, ERC-1155), began to grow significantly and become tied to protocols with large financial volume. Marketplaces for crypto art and collectibles such as Rarible and OpenSea saw increasing volumes of purchases in the third quarter. Personal and social tokens have also evolved through projects like Roll and Async Art.
How to read the full Q3 DeFi report: https://consensys.net/insights/q3-defi-report/
James Beck manages corporate communications, PR for consumer goods and Eth2 marketing at ConsenSys. He has ghost-written comments and articles for ConsenSys executives that have been published in Wired, Quartz, and other industry publications. James is excited about the increasing crossover between non-fungible tokens and art, as well as Web3 models for collective savings accounts like Susus. Contact James.