Coral DeFi Market Primer — May 2021
Collateralized Lending Protocols & Decentralized Exchanges
The growth in decentralized finance (“DeFi”) over the last twelve months has been nothing short of astonishing.
We define DeFi as the codification of traditional Wall Street verticals, such as: ABL/repo markets, exchanges, payments and derivatives. The magic here is that when these processes are written on a trustless layer (such as the Ethereum blockchain), true P2P transactions can occur.
The benefits to the participants are clear. By removing layers of middlemen, depositors can earn 15%+ APY on their US dollar denominated deposits and borrowers can execute and fund asset backed loans in seconds at superior rates to traditional financial institutions.
DeFi Market Overview
Growing from sub $1 billion in Total Value Locked (“TVL”) to >$40 billion in under twelve months (as of March 29, 2021) is evidence of a maturing industry, with strong demand for DeFi products.
The clear market leader as a Layer 1 platform is the Ethereal Blockchain. The developer community of Ethereum has a 3–4 year head start on other Layer 1 blockchains, as solidity has become the coding language of choice for a majority of the world-class blockchain developers.
DeFi Platforms
A number of DeFi platforms hit product market fit, off the back of the broader digital asset rally in the last twelve months.
In this primer, we will delve into two of the clear market leading categories for DeFi platforms: collateralized lending platforms (Compound, AAVE & Cream) and decentralized exchanges (Uniswap, Sushiswap & Bancor).
Collateralized Lending Platforms
As the notional value of digital assets increase in value, investors are seeking alternative ways to tap into liquidity on their assets.
While centralized companies like Blockfi & Celsius have gained a foothold in the space originating Bitcoin & Ether backed loans, their rates and process endure a fair amount of friction relative to platforms like Compound Protocol & AAVE.
Compound Protocol currently has over $11.8 billion in assets deposited and $5.5 billion in loans originated against that collateral. A user can deposit their Bitcoin and fund a loan on Compound in seconds at attractive rates. In addition, servicing and closing out the loan are just as frictionless.
A large percentage of these deposits are investors seeking to take out a USD denominated loan against their Bitcoin holdings, avoiding a capital gains event and tapping into additional liquidity to chase yield. The current market dynamics provide an attractive opportunity for investors who provide the stablecoin deposits for users to tap into, in many cases pushing USD denominated deposits to the 15–20%+ APY range.
As the digital asset sector continues to grow in USD terms, investors will continue piling in on these platforms.
Decentralized Exchanges
Decentralized Exchanges (“DEX”) allow users the ability to trade thousands of pairs of unique digital assets, in a frictionless manner, by incentivizing Liquidity Providers to supply the assets for these pairs. DEX’s have been around since 2017 but have only begun to scratch the surface on critical mass.
The clear market leader thus far in this category, Uniswap achieved $100 billion in cumulative volume in February 2021. A leading decentralized exchange, Uniswap leverages Automated Market Making (AMM) technology to provide liquid order books on thousands of pairs of digital asset tokens. Liquidity providers provide both sides of a trading pair and are compensated in the form of a % of the total trading volume on that asset pair.
This past week, Uniswap announced plans to roll our Uniswap v3 in early May 2021. Rather than supplying liquidity across the entire bonding curve of trading pairs, v3 will allow liquidity providers the ability to choose the parameters along the curve by which they supply liquidity. What does this mean for the end user? Deeper order books, with lower slippage for traders and a myriad of revenue opportunities for liquidity providers.
The general trend of 2020, into 2021 across all exchanges has seen DEX volume eat into the market share of traditional exchanges like Binance, Coinbase and Kraken. As a percentage of overall digital asset trading volume, DEXs comprised 0.4% of overall volume as of January 1, 2020 and reached 6.1% as of December 31, 2021. Recent estimates place DEX volume as 10.5% of overall digital asset trading volume.
While Uniswap is the clear leader in terms of volume, surpassing $7 billion in total volume the past week, the battle for DEX volume is heating up. Upstart competitor Sushiswap is pushing $2 billion in weekly volume and offers a number of unique features to users, including: fee accrual to SUSHI token holders, yield farming pools directly on platform and lower gas fees.
Rounding out the list of DEX’s we will quickly touch on Curve, Bancor and Balancer.
Curve is a protocol that allows for extremely efficient stablecoin trading. Curve boasts nearly $4.2 billion in TVL, after breaking $1 billion for the first time in August 2020. Users have flocked to Curve when needing to exchange one stablecoin asset for another, for example exchanging USDC for Tether (“USDT”).
Similar to Uniswap and Sushiswap, Bancor is an AMM protocol. As of late, Bancor has experienced significant growth, touching $1.5bn TVL at the end of March, up from $150 million of TVL at the end of 2020. The defining feature offered by Bancor has been single sided liquidity providing, meaning LPs can provide a single side of the trading pair. In addition, Bancor has offered a liquidity mining incentive of backstopping impermanent losses for LPs who supply assets for 100 days.
Rounding out the group of blue chip DEXs, we have Balancer, an AMM that allows for the customization of LP pool weights. Rather than a 50/50% split on any asset trading pair, Balancer can offer trading pairs of three assets with a 25/25/50% split. This defining characteristic has made Balancer a favorite among yield farmers, with current TVL of $1.8 billion, up from $580 billion at the end of 2020.
PROPERTY OF CORAL DEFI LP. THIS IS NOT AN OFFER TO BUY OR SELL SECURITIES, OR A SOLICITATION OF AN OFFER TO BUY OR SELL SECURITIES. THIS PRESENTATION IS INTENDED FOR INFORMATIONAL PURPOSES ONLY.
