The dopamine’s raging, and the bears are in disbelief. We’re seeing ridiculous pumps on alt L1s such as Aptos and Canto.
Here’s what we got today:
- The Stablecoin Wars. We take a look at the next generation of decentralized Stables.
- Optimism vs Arbitrum. A quick lesson on mercenary capital.
- Narrative Tracker. An easy way to keep track of all the narratives in Crypto
- Around the Web. Flashbots is raising, Uniswap will be on Binance Chain, and more.
Let’s Dive in!
📉 THE MARKETS
“I don’t look to jump over seven-foot bars; I look around for one-foot bars that I can step over.” – Warren Buffet
The Next Generation of Stablecoins
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Stablecoins are the most important use case for DeFi right now. They counterbalance Crypto’s volatility and give us a simple way to pay for transactions.
The problem? All the leading stablecoins are centralized: USDT (Tether), BUSD (Binance), and USDC.
The risks include:
- They can be frozen.
- Governments can regulate them.
- We have to trust that they’re backed up 1:1 (Remember, FTX was audited too!).
It is kinda weird that “Decentralized Finance” is powered by centralized stablecoins.
The industry DID try to have a massive decentralized stablecoin with Terra Luna’s UST. That was 100% algorithmic and failed.
Now we have a new generation of decentralized stablecoins about to launch. The biggest names in DeFi back them, and they have mechanisms we haven’t seen before.
Let us look at some upcoming decentralized stablecoins.
Aave’s GHO
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Aave is the biggest lending protocol in DeFi ($4.66B TVL). $GHO is their token in the upcoming stablecoin wars.
What’s different about $GHO? Facilitators and Buckets. Facilitators are entities who can mint and burn GHO tokens. “Bucket” is the max amount of GHO a facilitator can mint.
Aave governance will decide who can be a facilitator and their Bucket. Aave protocol will be the first facilitator.
This system will allow GHO to grow using many different strategies. Aave protocol uses one strategy: lending GHO against LP positions.
This is the familiar mechanism of over-collateralized lending:
→ Users will provide LP tokens as collateral.
→ Facilitator will provide GHO below a liquidation threshold.
→ Users will pay interest. To close the position, they can pay the full amount.
→ The position will be liquidated if they fall below the liquidation threshold.
This mechanism will allow them to tap into the gigantic TVL they already have. Now, users can use their idle LP positions to access liquid money.
For the degens, who love to take leverage, this will be a no-brainer. If Aave can tap into even a fraction of their TVL, they can enter the market with a bang.
Technically, GHO can implement many other strategies as well.
- A new facilitator who can mint GHO against treasury bills.
- Another facilitator who lends against the Real World Assets.
- A facilitator who provides undercollateralized lending based on credit scores.
Buckets will limit the max number of GHO a facilitator can mint. This will help in limiting risks associated with each strategy.
This will enable fast growth of GHO while limiting risks.
Curve Finance’s crvUSD
Curve Finance is the go-to DEX for pegged assets. ($4.07B TVL)
Uniswap’s AMM formula was inefficient for pairs of similar values. Curve’s unique AMM formula made it efficient. This innovation was the key to their success.
Now, they’re introducing a new formula for minting crvUSD: LLAMMA
Lending Liquidating AMM Algorithm, aka LLAMMA, creates a dedicated market between collateral and crvUSD. Users can deposit collateral to LLAMMA market to mint/borrow crvUSD. According to speculators, collateral will include $ETH & Curve LP positions.
LLAMMA will constantly convert between collateral and crvUSD.
- If collateral price goes up, part of it will be sold for crvUSD.
- If collateral price goes down, some collateral will be repurchased.
This can also be seen as gradual liquidations and liquidations. And it is automatically done by LLMMA.
Benefit: users won’t have the risk of their entire position getting liquidated.
Cost: LLAMMA rebalancing can result in loss. You are selling high and buying low.
crvUSD has a unique mechanism for maintaining the peg as well.
- If the price goes >1, protocol will (uncollateralized) mint crvUSD in the stableswap pool.
- If the price goes <1, protocol will withdraw and burn crvUSD from the stableswap pool.
There are some downsides to crvUSD. They don’t have the lindy of $DAI or growth potential as $GHO. Nevertheless, it is important for several reasons.
- The new system will increase trading volume.
- New revenue opportunities, such as borrowing fees.
- The ability to collateralize LP positions will attract more liquidity.
- Enables borrowing a stablecoin without facing liquidation risks.
- Their center stage in stablecoin liquidity may enable them to drive liquidity to crvUSD.
Read Curve’s crvUSD White Paper
Aave and Curve are the big guns in this race, but there are some other ones we wanted to mention.
1) Tapioca Dao’s USDØ. TapiocaDAO is building the first omnichain money market across 12+ chains. And USDØ is their stablecoin. Using LayerZero, USDØ can be transported across 12+ chains without any bridges, wait times, or fees.
2) Redacted Cartel is set to release a stablecoin called Dinero. Most likely, it’ll be an overcollateralized stablecoin backed by staked ETH. More details will be released after the Shanghai update is here.
3) Dopex is pivoting away from a Stablecoin. Dopex is a popular decentralized options protocol. There were plans for dpxUSD. It’s no longer on their roadmap. Instead, they’re now working on a synthetic ETH called dpxETH. It’s believed that this was to avoid issues with regulations.
Whatever challenges there might be, the need for a decentralized stablecoin is paramount. And it is potentially a trillion-dollar market. So, we can expect brilliant teams to compete with innovative models.
Together With Metronome
What Makes Metronome Different?
Last week, we introduced Metronome’s new synthetic asset protocol.
If you missed that introduction, here’s a quick recap of their recent Synth beta launch:
- Metronome is building a next-gen DeFi ecosystem, starting with their first synthetic protocol, Synth.
- Since their beta launch on January 10th, the protocol has amassed over $1.6M in collateral TVL.
- Metronome secured FRAX’s first synthetic integration shortly after the beta launch.
This week, we’re highlighting their unique differentiators. Why choose Synth over existing synthetic asset protocols? 🤔
- Multi-asset collateral: The convenience and flexibility of choosing amongst a wide variety of collateral assets such as ETH, USDC, WBTC, FRAX, & more.
- Multi-synthetic minting: Currently, you can mint msUSD, msETH, msBTC, and msDOGE – with additional synths in the pipeline.
- Productive collateral assets: Synth allows collateral to be provided in the form of productive, yield-bearing assets (like derivatives positions and liquid staking tokens).
They also employ yield-aggregator looping strategies with this productive collateral.
The 80/20: Use a variety of assets as collateral to mint a range of synthetic assets. Then hold those synthetic assets as a spot position or use them to earn additional yield across DeFi.
Metronome Synth combines industry-leading synthetic features into one efficient application.
Interested in putting your assets to work?
Start trading through their beta launch to see what all the excitement is about!
📊 Arbitrum reclaims the title
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This chart compares the # of transactions per day on Arbitrum and Optimism (The two leading Ethereum Layer 2 solutions).
On December 18th, there was a steep fall in Optimism transactions. On that day, Arbitrum overtook Optimism. This comes after a big lead established by Optimism over December and January.
What happened: Optimism Quests ended.
What are Optimism Quests? Optimism quests were an incentive program to promote the Optimism ecosystem. Using different dApps on the OP chain was presented as quests. Commemorative NFTs were awarded to those who completed the quests.
Optimism Quests ended on January 17th, 2023. When the incentives were gone, the market went back to equilibrium. Arbitrum regained its lead due to organic usage (much of it is driven by GMX’s success)
Lesson: Understand incentives and mercenary capital. Sometimes you’ll see a chain get massive usage due to temporary incentives. But once the incentives are gone, many users may not stick around.
📃 Stay Organized with a Narratives Tracker
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I’ve noticed most people have a hard time keeping up with narratives.
One easy way to stay organized is to have a Narratives Tracker. I created a Kanban board in Notion that helps me keep track.
Don’t worry about the software – you can create one using Excel or even physical sticky notes.
Here’s what each column means:
- Potential narratives. I don’t see any catalysts happening at the moment, but it’s something that has long term potential.
- Observing. It means I’m not actively investing in it now but paying attention.
- Short Term Trades. A narrative that I’m trading for the short term.
- Long Term Investment. Looking at investing for the long term.
- Done. The play is over, and I don’t think it has potential anymore.
You can add extra tags, such as the token being released or unreleased. If I click on a Card, it gives me more detailed information.
I created the board as an example – don’t take it as a signal to trade Canto or that I’m fudding Cardano 😂.
Anyways, hope this helps. There’s so much information to keep up with in DeFi. It pays dividends to take the extra step to stay organized.
🌍 What’s Happening?
📰 Industry News
Flashbots is raising up to $50 million at a billion dollar valuation. This has raised some eyebrows since they were positioning themselves as a public goods enterprise.
MetisDAO launches Koris. It is an infrastructure platform for Decentralized Autonomous Companies.
Porsche released its NFT collection. Its floor price fell below its minting price of 0.911 ETH in the hours after it opened sales to the public.
Digital Currency Group, a key player in the current CeFi meltdown, is looking to sell CoinDesk. It illustrates the cash-crunch that DCG is facing.
Gemini launched an electronic over-the-counter trading (eOTC) solution. This is a product oriented towards institutional investors.
🍿 DeFi Bites
Uniswap decided to deploy the V3 on Binance Smart Chain. Some are estimating that this will increase the TVL of the app by $1 Billion.
Aave is voting on the deployment of 3.0.1 version of Aave V3. Stani, the founder of Aave, has said that $GHO will follow weeks after the deployment of Aave V3.
ConvexFinance’s new wrapper for $cvxCRV is now live. New wrapper updates the dynamics of $cvxCRV.
MakerDAO decides to deposit up to $100 million USDC on DeFi protocol Yearn Finance. It is predicted to earn a 2% annual yield.
Maple Finance open sourced their smart contract repositories for Maple 2.0. Maple 2.0 is a complete overhaul of the protocol to be much more flexible, modular, and scalable.
Chainway introduces proof-of-innocence. It allows users to prove that their withdrawals from Tornado Cash are not from a list of specified deposits, selected by the user themselves.
Fantom’s Ecosystem vault is now live. It is a community-focused on-chain fund for supporting builders on Fantom.
🧠 Twitter Alpha
😂 Meme
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