If 2019 was the year of centralized crypto exchanges, 2020 is the year of decentralized finance (DeFi). Over $12B of various crypto assets are held in the growing DeFi ecosystem today and it’s clear that investors are looking for projects that will survive another potential crypto winter. We’ve identified some of the hardiest DeFi projects based on either their ability to provide irreplaceable ecosystem services or a sustainable tokenomic design geared for the long haul.
Services
The landscape of the decentralized finance (DeFi) market has changed dramatically over the past few month.
Before September 2020, The most common and familiar experience for many first-time DeFi users are the high APY liquidity pool (LP) token farms ERC-20 tokens, or depositing to one of dozens of high APY single asset vaults which reward regular dividends generated by aggressive arbitrage and competitive swapping strategies on the Ethereum network.
What’s DeFi without exaggerated APY and competitive lending and borrowing rates?
Without a doubt it is the reliable services which fit different Defi users’ needs. Taking example of the LP farms and interest-generating strategies, they are heavily reliant on the reliable price quotes from oracles. The most crucial component of many DeFi protocols are their ability to call for and receive accurate and timely price information in order to execute on-chain trades or swaps between different cryptocurrencies. Oracles underpin the vast majority of Defi functionality for platforms and services which provide flash loans for arbitrage services, or even accelerated interest-yielding deposit contracts. Thus, oracles are truly the irreplaceable ecosystem services demanded by Defi users and the Ethereum network. Without further ado, let’s take a look at the following projects which have solid distributed frameworks that’s built for programmable money:
This is the pre-eminent on-chain lending platform, allowing borrowers to trade native derivatives and leverage on Ethereum. Flash loans in particular make AAVE a notable service because of the outsized impact it has on ERC-20 assets and the total market capitalization of cryptocurrency. Price oracles are crucial for flash loans, for instance, because the loan must be secured at a peg price and repaid within the same block. Off-chain sources for price quotation are also needed since the protocol allows the lending of non-ERC assets.
AirSwap is a peer-to-peer, non-custodial exchange protocol for trading ERC tokens. This means traders can identify potential counterparties, negotiate directly (and privately), to execute on-chain transfers of any type of Ethereum token. Currently this protocol is being used for atomic swaps in the Metamask dApp.
Nest Protocol believes there is immense value in creating a digital economy around the need for reliable price queries in what is called “quote mining”, a competitive way to generate accurate pricing strings for price callers — generally DeFi protocols and institutions. Quote pool (QP) tokens are rewarded for each verified LP staking cycle of 25 blocks on the Ethereum network. This is a new and unique approach to mining which insulates stakers from impermanent loss while still providing strong economic incentives for miner and verifiers while punishing bad actors. Quote mining and price verification also provides incentives for would-be arbitrageurs while guaranteeing an accurate return value for any cryptocurrency query.
Tokenomics
In addition to providing an effective product or service there should be an equal emphasis on a well thought token model which accounts for emissions, vesting periods, and even basics like supply and utility. While many projects in the ICO-era of 2016–2017 used cookie cutter approaches to team token unlocks, total token caps in the tens or hundreds millions, and a dubious inflation rate, the DeFi class of 2020 has learned the lessons of their predecessors and have found ways to bake value into these very considerations. For instance, a low supply token that is available to all users through a fair launch has an immediate value proposition that an inflationary token cannot match. Here are some projects with strong tokenomic designs that will help carry them through the next crypto winter.
Compound.finance is much like AAVE in that their service is focused on crypto lending and lower risk strategies for producing interest. COMP tokens are distributed to participants who commit their ERC-20 tokens to a lending pool as well as those who help maintain and upgrade the Compound platform. At this point the project has been “”set free” and given to the community with no further team token unlocks to dilute the supply or add market sell pressure. Expect this protocol to grow as more sophisticated oracles and swap tools are deployed on Ethereum.
Yearn.finance was perhaps the most notable fair launch token, known also for eclipsing the price of Bitcoin with the help of it’s modest supply cap of 30,000 tokens. If there is a profitable strategy for arbitrage trading stablecoins, ‘juicing’ new farming protocols, and finding nuanced market inefficiencies and opportunities, Yearn.finance vaults and earning modules will capture and share these profits among YFI holders. As strategies improve the YFI will become a positive feedback loop which rewards the most profitable strategy authors. Simply put, the token is successful from a store of value and utility standpoint.
By allowing any account to become a maker, miner or verifier, NEST welcomes all parties who wish to contribute to the strength of the DeFi ecosystem and earn passive income for providing quotation services. Unlike regular LP mining — which exposes users to impermanent loss — QP token farming through quote mining carries very little risk of impermanent loss because a staking cycle is just a few minutes. And unlike many other farms which lead to runaway token inflation, QP tokens do not dilute the market and disadvantage future investors. QP tokens can be re-staked on the NEST platform to earn a portion of ETH fees generated from QP mining The competitive reward structure that powers this framework will help form a solid user base regardless of market conditions.
In Conclusion
It is expected that DeFi will continue to grow in volume and scope to create new needs for price oracles and incentives for calling reliable quotes. Meanwhile, investors and traders will continue to hunt for the absolute best tokenomic models that have a history of optimized returns. As users look for more attractive earning opportunities and individual platforms try to out-do each other, the need for on-chain and off-chain price queries grows exponentially with more farming, lending, and swapping services. If there is an oracle that can both use its token’s endogenous value and the same time fulfill the need for on-chain/off-chain price queries, it will no doubt be a success in the long run.
In NEST protocol, we do see that potential.
