- Following a year of significant developments for decentralized derivatives, particularly from perpetual futures exchange protocols, the space received immense attention as a result of FTX.
- Uniswap continued to dominate DEX volume in 2022, but its competitors continue to innovate in vertical integration and token design.
- Lending yields dipped below TradFi yields, and protocols saw an 80% decline in TVL. Undercollateralized lending protocols proved too good to be true and that further safeguards are needed. Protocols saw significant battle testing and functioned as designed.
- Users lost confidence in decentralized stablecoins after the death of UST. Decentralized stablecoin market caps declined from their peaks by an average of 55%.
- The NFT marketplace landscape was shaken up in a big way over the course of 2022 with the launch of Blur, the rise of wash trading, and web2 powerhouses getting involved in the space.
The back half of 2022 proved to be a difficult time for the crypto industry, with contagion from Terra’s collapse spreading to numerous CeFi entities. User demand to transact decreased with block space becoming more abundant than ever, developer activity continued its downtrend, and the drying liquidity felt drought in traditional markets was amplified in our ‘tail risk’ industry. Crypto experienced a 77% decline in TVL from $270B at the start of the year to $60B today and price action did not perform any better, with the total crypto market cap falling 67% from $1.35T to $437B when excluding BTC.
While the near term outlook remains grim, only the biggest believers remain in the space with the frauds and over leveraged players washed out. There are many teams building innovative products across app-specific chains, Ethereum and its L2s, and other L1s. These dApps span far and wide from derivatives products, DEXs, borrowing and lending protocols, stablecoins, NFT infrastructure, liquid staking derivatives, and more. Undeterred by the decrease in personnel, companies, investments, prices, and TVL, builders continue to trailblaze in this nascent industry, with the quality of the underlying technology constantly improving.
The collapse of FTX led to a loss of trust in centralized custodians. The capital misappropriation by one of the most popular crypto derivatives exchanges brought substantial positive attention to the decentralized alternatives. When trading on dYdX, GMX, gTrade, and many other perp DEXs there is no requirement to custody funds with a third party. The value proposition of traders maintaining control of funds at all times became more apparent than ever.
2022 was a big year for dYdX as the team announced its move from a Layer-2 zk-rollup to an application specific blockchain built with the Cosmos SDK. The chain is expected to launch in the first half of 2023, paired with a large token unlock. The biggest upgrades will be a fully decentralized orderbook and revamped tokenomics whereby protocol revenue (trading fees) will be returned to DYDX token stakers. Despite the fundamentally bullish update, the token is down 60% priced against ETH on the year, likely due to its highly inflationary nature.
At the beginning of the year, dYdX passed a governance proposal to launch a grants program. At the end of the year, an operations DAO. Both are part of an evolving governance structure of subDAOs: budgeted entities under the main DAO which operate for specific tasks. Throughout the year dYdX drastically lowered trading fees, listed over 10 new tokens, and launched an IOS app. Despite the developments, trading volumes declined on par with centralized counterparts.
GMX was a hot topic in 2022 and landed on almost all crypto investors’ radars. The project led the “real yield” narrative thanks to its protocol revenue accruing token and was at the core of the Arbitrum narrative. Despite the massive PR success, GMX suffered from a design level exploit in which a trader successfully manipulated the AVAX price oracle to GMX and captured approximately $160K from the GLP basket. There was also a flaw in the GLP token’s price calculation that led to some small price discrepancies for buyers.
GMX continues to be a popular trading venue among crypto native retail thanks to its minimal trust assumptions, zero price impact trading, and high leverage. Towards the end of the year, delta neutral GLP strategies became popular. These strategies deploy capital to GMX by minting GLP and hedging out the price risk of the assets in the basket. GMX continued to gain momentum in volume traded throughout the year despite volumes across the broader market decreasing tremendously. In fact, GMX was the best performing token of any asset we cover.
Gains Network launched gTrade on Polygon in early 2022 and has been making strides ever since. gTrade uses DAI from LPs to collateralize the opposite side of any position a trader takes. Later in the year, the protocol launched support for synthetic stock trading. GNS, the network token and another “real yield” coin, performed at the top of its class in DeFi tokens. Although not included in the price chart above, GNS, like GMX, greatly outperformed ETH, by about 220% YTD. In 2022 Gains Network launched a referral program, foundation, and decentralized frontend. The exchange plans to launch on Arbitrum early in ‘23.
The mechanism behind gTrades synthetic tokens had a substantial remodel. The old design printed GNS and market sold it for DAI if the protocol became undercollateralized against traders, and bought and burned GNS in the opposite scenario. With the launch of the gDAI vault, DAI depositors receive liquid gDAI that accrues trading fees while taking on trader PnL and introduced a new incentive mechanism for the minting and burning of GNS OTC. The newly introduced gDAI model better aligns incentives for LPs to provide DAI in the case of under collateralization while enhancing the interoperability of LP tokens by providing more opportunities for depositors to earn additional yield. gTrade did not suffer the same extent of volume decline as most exchanges.
Synthetix, the largest synthetic asset protocol, showed great strides in development this year despite the performance of the SNX token, which represents collateral for the entire system and is down 92% YTD. The first of its major developments came in May 2022, when Synthetix’s atomic swaps product was integrated directly into 1inch, a popular DEX aggregator. Atomic swaps use oracle based pricing from a combination of Uniswap and Chainlink oracles to allow instant synth trades at no slippage. By integrating into 1inch, trades could be routed through synths and utilize atomic swaps for best pricing. For example, a trade from USDC to ETH could be routed as USDC > sUSD > sETH > ETH. This led to an explosion in synth volume in June and therefore fee revenue for SNX stakers. However, problems with latency attacks caused atomic swaps to be paused before an upgrade was implemented this December.
Synthetix also expanded its ecosystem on Optimism, with many protocols taking advantage of SNX liquidity and its synthetic assets. The largest of these is Kwenta, a perpetual futures exchange allowing up to 25x leverage and a spot exchange built on 1inch to enable the trading of synths with other ERC-20 assets. Other protocols include Lyra for options, Overtime for sports betting, and Thales for creating any parimutuel market. The next developments for Synthetix should also help with adoption. Perps V2 utilizes Pyth oracles in order have very efficient pricing for Synthetix perpetual futures and will allow for far lower trading fees. Synthetix V3 rebuilds the infrastructure of the protocol to allow more modularity and customization, bringing things such as new collateral assets, siloed debt positions, staking accounts represented by an NFT, and “funds” for customized capital allocation.
Unlike decentralized perps exchanges, which saw valuable adoption, decentralized options remained niche. Regardless of their lackluster usage, the leading builders in the space keep shipping. Ribbon Finance expanded its product suite, creating Earn and Lend: principal protected on-chain options strategies and uncollateralized lending, respectively. What we found most exciting was Ribbon’s announcement of Aevo, a soon-to-launch on-chain options exchange similar to dYdX. Aevo is being built as an application-specific L2 forking Optimism and will feature its own orderbook. This marks a fundamental shift in DeFi options from week-long illiquid vaults to any time liquidity.
Ribbon wasn’t the only DOV/structured product protocol to expand its offerings. Dopex created Atlantic Options which enable borrowing from a vault’s collateral to use in a closed loop. Atlantic Options opened the door to GMX liquidation protection and straddles, which were created this year, but also to more use cases in the future such as strangles, options spreads, perpetual future / CDP liquidation protection, and insured stablecoins.
As with decentralized perp exchanges, the importance of decentralized spot exchanges were repeatedly highlighted in 2022, capped off with the collapse of FTX. DEXs currently facilitate just ~10% of CEX spot volume, but continued innovations in AMMs and an increase in self-custody could drive the dominance away from centralized entities. Regardless, DEX tokens suffered the same fate as most DeFi assets, falling 60-90% YTD.
Uniswap dominated total DEX volume throughout the year. Specifically since September, Uniswap has facilitated at least 48% of all DEX volume. It also has strong volume dominance on Ethereum L2s, executing over 60% of volume on both Arbitrum and Optimism.
Another trend to monitor is the popularity of liquid staking derivatives (LSDs), which are discussed in more detail later. As more users use LSDs for improved capital efficiency, there will be more demand to trade the assets on DEXs. Even after the Shanghai Upgrade, staked ETH withdrawals will not be instant and will be processed according to the withdrawal queue. LSD users that want instant liquidity will continue to drive volume to DEXs. While Uniswap dominates total DEX volume, it only facilitates a fraction of the total LSD volume. Lido’s stETH, the largest LSD by a wide margin, has deep liquidity on Curve, likely due to CRV incentives. At its peak, 6.1% of daily CRV emissions were allocated to the stETH pool.
Over the past year, Uniswap Labs raised $165M at a $1.6B valuation, launched an NFT marketplace after acquiring Genie, and created a venture arm. Uniswap V3 was deployed on Polygon and Celo with passed governance proposals to deploy on Moonbeam, Gnosis, and zkSync v2, in addition to being deployed to Mainnet, Arbitrum, and Optimism in ‘21.
Uniswap governance spent the back half of the year in a heated debate about turning on the fee switch. The fee switch is a dormant boolean parameter in the protocol that redirects a portion of trading fees from LPs to an address specified by the DAO. The governance proposal was put up for discussion and passed a temperature check with 100% approval in July. The vote has still not moved on-chain thanks to influential figures (a16z and others) voicing concerns about US regulatory scrutiny and a 2.5M UNI requirement in order to propose on-chain. Throughout the ordeal, governance managed to pass a proposal to create a foundation and fund it with $74M to replace the grants program.
Curve continued to play an important role in DeFi throughout 2022, as it is the largest DEX by TVL and facilitates the second most DEX volume. Since it was originally built for stablecoin swaps, Curve was in the eye of the storm during the MIM and UST depeg events. While being a crucial piece of infrastructure during the UST depeg gave credence to the importance of the protocol, it was costly to TVL, shedding nearly $10B in one week. The protocol also furthered its ties to Frax with the launch of the Frax Base Pool. The USDC and FRAX pair has amassed $466M in TVL, with 28 metapools paring with the Frax Base Pool, totaling an additional $114M in TVL.
Curve utilizes a vote-escrow tokenomic model to incentivize liquidity into the protocol. Token holders can lock CRV for veCRV, which confers governance rights and earns 50% of protocol revenue. CRV emissions are designed to bring liquidity to the protocol in the early stages of its existence. Emissions began at 274M CRV per year, which is reduced by 15.9% yearly until exhaustion. Based on the programmatic nature of the supply schedule, there will be meaningful emissions until 2030, at which point 90% of all CRV will have been emitted. However, Curve needs to reach an inflection point where organic revenue attracts sufficient liquidity without the need for liquidity incentives. Emissions are a token distribution method, not a business model.
While CRV is highly inflationary, vote-escrow locking is designed to offset the daily emissions. Thus, the daily lock rate is akin to the heart rate of the protocol. It measures the percentage of daily emissions locked as veCRV and removed from the liquid supply. Throughout 2022, the protocol averaged a 48.1% daily lock rate, and the total amount of CRV locked as veCRV increased from 36.7% to 40.5% of the total supply.
The incentive to lock CRV for veCRV is for governance power and fee revenue. If the incentive weakens and fails to attract new locks, token holders will become diluted by liquidity emissions. Another way of visualizing the impact of vote-escrow locks is through the net inflation rate. The current scheduled inflation rate is 25.4%, but after adjusting for veCRV locks, the net inflation rate falls to 15.8%. Again we see how vote-escrow locks are vital to the health of the CRV token.
Curve leans heavily on tokenomics to gain a competitive edge in the DEX landscape. Overall, the protocol remained healthy in 2022 and continues to play a meaningful role in Ethereum DeFi. The release of crvUSD is discussed later in the report but will likely drive more usage to Curve, increasing protocol revenue and the incentive to lock CRV for veCRV. The protocol is poised to increase its relative volume share, given its dominance over LSD liquidity.
Sushi did not stop shipping developments in 2022. The decentralized community released tokenized Sake NFTs limited to 888, a concentrated liquidity AMM: Trident, a token launch (IDO) platform: Miso, and added exchange features such as limit orders and MEV protected trading. Sushi launched xSwap, a DEX for cross-chain swaps using Stargate. xSwap allows traders to easily swap between assets on Mainnet, Arbitrum, Avalanche, Polygon, Fantom, Binance Chain, and Opera in one click. The updates did not go unnoticed, and Golden Tree, a hedge fund with $47B in AUM, made a strategic activist investment in the SUSHI token (in the single digit millions), leading to a sizable outperformance in the price of SUSHI in the weeks after.
Uniswap was not the only DEX that had heated discussions in the governance forums throughout the year. After years of a public lack of leadership, the Sushi DAO elected a new head chef, Jared Grey, to help steer the protocol forward. The head chef’s first initiative was to clean up spending and budgeting. He realized the team only had 1.5 years of salary runway and proposed a governance vote to redirect protocol revenue from buying SUSHI and giving to SUSHI stakers and instead sending it to the treasury to pay developers. After much controversy and a neck and neck race, the vote passed. The SUSHI token gave back all gains from the Golden Tree investment, and then some. Jared has also hinted in the Discord that he plans to propose a token revamp very soon.
Trader Joe was the heart of the Avalanche ecosystem in ‘22. The novel concentrated liquidity AMM, Liquidity Book, put Trader Joe on par with Uniswap in terms of capital efficiency for LPs. Rocket Joe created a launch platform for Avalanche based tokens and was paired with a revamp to JOE tokenomics that included the creation of rJOE, veJOE, and sJOE in place of xJOE. Joepegs, an NFT marketplace, helped revitalize the NFT ecosystem in Avalanche. The team also announced a $5M raise for Joepegs, so they should have plenty of runway to keep innovating. Finally, the DEX deployed on Arbitrum testnet and a launch on mainnet is expected early next year. This could be a huge catalyst in 2023 for the exchange, given the L2s hype and inevitable token launch.
In February, Balancer governance approved the migration to a vote-escrow tokenomic model, aiming to change as little as possible from the battle-tested Curve implementation. One key difference in the Balancer model is that users must lock 80/20 BAL/ETH LP tokens for veBAL instead of just BAL. The implementation improves the efficiency of locked BAL by providing deep on-chain liquidity, but it locks 20% less BAL than the Curve implementation would. As the vote-escrow implementation matures, it will be important to monitor the impact on the BAL lock rate.
Given ve tokenomics are designed to attract liquidity at the early stages of a protocol’s existence, TVL is a simplified measure of success for the transition. Though Balancer TVL is down -54% YTD, it outperformed its peers by a meaningful margin. However, the ultimate measure of a DEX is volume. Balancer falls considerably short of both Uniswap and Curve, but it did gain significant ground on SushiSwap over the year.
In addition, the BAL daily lock rate sits at 107.7%, showing strong demand for veBAL governance rights. While the vote-escrow implementation is similar to Curve’s, comparing the two protocol’s lock rates is not straightforward. Balancer upgraded to the model, so the initial supply and programmatic inflation differ from Curve which has used a vote-escrow model since genesis. The metrics are best compared relative to the historical values of each protocol.
Towards the end of 2022, Balancer experienced the struggles of a governance-controlled emissions design. One whale, named Humpy, took advantage of the protocol by amassing a large veBAL position. Humpy controlled over 30% of the total veBAL and used the governance rights to approve a new gauge on a low liquidity pool, the CREAM/WETH pool. Humpy owned a large portion of the pool’s liquidity, so he was effectively directing BAL emissions at himself. The whale was not aligned with the community’s goals, but as the largest holder of veBAL, Humpy had significant sway over governance votes and could impose its force. BIP-128 passed on December 12, formalizing a peace treaty between Balancer and Humpy. An interesting piece of this proposal states, “To ensure that 51% attack is off the table, Humpy has agreed not to increase his position, and to unwind ~750k veBAL starting immediately, and allow Balancer governance to blacklist his addresses if they extend unlock time,” showing the dire need for Balancer to resolve this issue. With the treaty in place, Balancer can now move forward. Aura, a yield aggregator discussed later, is now the largest veBAL holder.
Osmosis currently sits at the center of the Cosmos Ecosystem with more liquidity, IBC volume, and active addresses than the Cosmos Hub. While it only facilitates less than 1% of total DEX volumes, it is the largest IBC-enabled DEX app chain. If there is a “big bang” of Cosmos app chains in the future, Osmosis is well positioned to be the liquidity hub.
The recent Binance listing brings more utility to the OSMO token as it can be used to onboard into the ecosystem. The added utility will benefit OSMO, which currently faces high inflation and low trading fee revenue. Osmosis utilizes a “thirdening” schedule where new emissions are decreased by one-third every June. The current inflation rate is north of 30%, which incentivizes both security and liquidity.
In June, Osmosis was halted for emergency maintenance shortly after the v9.0 network upgrade went live. The bug doubled counted LP deposits, allowing attackers to drain the liquidity pools by joining a pool, receiving 1.5x more LP tokens, withdrawing 1.5x more liquidity than was initially deposited, and looping the process. The chain was halted before meaningful damage occurred. Like most Cosmos chains, Osmosis is a PoS blockchain based on Tendermint consensus, which favors security over liveness. Therefore, one-third of the validators can halt the chain by refusing to attest to new blocks. The Osmosis developer fund covered all LP losses caused by the bug.
Yield aggregators play a critical role in vote-escrow ecosystems by automating the locking of liquidity incentives. Liquidity providers deposit LP tokens into a yield aggregator for boosted yields and simplified position management.
Convex is the yield aggregator built to service Curve and offers Curve LPs boosted returns with its war chest of veCRV. CRV locked as veCRV through Convex is permanently locked to continually boost LP returns. The protocol has locked over 287M CRV tokens and currently controls 50.7% of the total veCRV supply. Convex has effectively won the war to accumulate the most CRV and stands to continue its dominance in the ecosystem. The protocol recently expanded to service Frax, has locked over 6.6M FXS, and controls 26.2% of the total veFXS supply. Convex is the largest holder of both veCRV and veFXS.
Aura, a Convex fork, was built on top of Balancer to provide similar services to Balancer LPs. It is the largest holder of veBAL with 22.7% of the total supply from 2.6M 80/20 BAL/ETH LP tokens locked. Aura notably amassed $600M TVL since launching in June and is partially responsible for Balancer’s revival.
veTokens are valuable since they have governance rights to control where future emissions flow, so there is an economic incentive to acquire them. Since yield aggregation protocols are excellent at acquiring these assets, a bribe market has sprouted on top of them around the idea of renting liquidity. When particular pools are voted for, new emissions flow to that pool, increasing the yield rises and incentivizing new capital into it. Therefore, users can pay yield aggregators to allocate their war chest of votes to a particular pool without taking on the risk of owning and locking the veTokens. Every two weeks a new bribe round closes and voters receive payment. Convex is the oldest and largest market, with $241M paid to Convex voters since September 2021 and a single round record of $21.4M paid to voters in April 2022. Aura launched in June 2022 and has generated a total $4.1M in revenue for Aura voters with a single round record of $451.1K in November 2022.
The intent of a bribe to either yield aggregator is to drive token incentives to increase a pool’s APR and attract liquidity to it. The ROI of a bribe can be measured by the total emissions (DEX veToken emissions plus any yield aggregator token emissions) received for $1 spent on bribes. Convex yields $1.30 while Aura yields $2.02, meaning it is currently more efficient to rent liquidity through Aura. Aura is likely higher, given its a younger protocol in the early stage of its emissions schedule. As the protocol matures, it is likely these two will find an equilibrium.
DeFi lending as a market segment fell off during Q4. With supplier reward rates lower than TradFi treasury yields and overall demand for leverage declining with market contraction, the lack of capital efficiency in overcollateralized money markets proved unattractive throughout the quarter. It is important to note that despite the FTX contagion, insolvent crypto entities prioritized the repayment of debt on these lending protocols, which proves that DeFi chugs on, functioning as designed. Despite a decline in value, development teams continued to ship improvements.
Aave and Compound: The Lending Titans
Aave continued to release details about its upcoming GHO stablecoin, which will be discussed further in the decentralized stablecoins section. Compound launched an institutional borrowing market where accredited institutions can collateralize BTC, ETH, and approved ERC-20 assets to borrow USD. The protocol continues to offer a 4% yield on USDC. Further, both protocols introduced ‘V3’s. Aave’s V3 boasts further capital efficiency, cross-chain liquidity availability via Portals, a high efficiency mode for max borrowing power, and even an isolation mode to reduce bad debt risks. Compound’s V3 emphasizes security, capital efficiency, and user experience. Each deployment of Compound V3 utilizes an isolated pool model, where a single bad asset cannot drain the entire lending pool.
While DeFi lending as a segment had its fair share of developments, these did not come without malicious activity. In November, a trader borrowed ~92M CRV from Aave and let the protocol liquidate $64M of his own collateral, leaving the protocol with $1.7M bad debt. By borrowing CRV against USDC and then manipulating CRV price higher, the trader made off with more value in CRV tokens than his collateralized USDC. It is important to note that the protocol functioned as designed, but due to illiquid token markets, the exploit also succeeded. As a result, AAVE holders voted to deprecate several low liquidity assets due to the risk of price manipulation. Although the bad debt was immaterial to Aave operations, it served as a warning signal for all DeFi lending protocols. Bad actors will continue to find and exploit value in any way they can.
Maker has made strides this year towards improving its governance structure along with creating the DeFi playbook for onboarding real-world asset (RWA) collateral on-chain. MakerDAO governance voted in favor of Rune’s Endgame Plan, which consisted of the creation of “metaDAOs” that will each have a separate governance structure and serve a singular purpose as a way to bring greater efficiency and better align incentives. The first metaDAOs proposed have been the Crimson Creator Cluster building an easy-to-use front end for Maker products, the Viridian cluster for RWA expansion with a positive world impact, and the Spring Cluster for connecting Maker with real-world businesses. We can also expect next year, as outlined in the Endgame Plan, the creation of a Maker ETH derivative similar to stETH to allow for increased capital efficiency and productive collateral.
The biggest advancements from Maker have come with its onboarding of RWA collateral. As a result of the U.S. sanctions against Tornado Cash connected addresses, Maker began a push to diversify away from USDC and USDT and towards RWAs, which caused a spike in RWA collateral backing DAI starting in October. Some primary examples of these initiatives include MIP65 which allocated $500M of the PSM into short-term treasuries and corporate bonds and a $100M loan partnership with HVBank. This has resulted in ~$600M in RWA collateral added this year for Maker, and puts them at the forefront of RWA strategy within DeFi.
Despite the bear market, undercollateralized lending protocols started the year strong with growing TVLs. Q4 ‘22 was the first time credit protocols suffered from defaults, a result of the first stress tests. In the wake of 3AC, Babel Finance defaulted for $10M causing Maple’s first default. A few months later in December Orthogonal Trading is confirmed to have defaulted on over $35M with an additional ~$10M in past due loans from Auros. The total value of Maple’s loan book at the time of Orthogonal and Auros was $70-$80M. The funds were not able to pay back their loans as a result of losing capital on FTX. We hope Maple can come back stronger with a revitalized strategy.
Goldfinch was the only credit protocol that made it out of the contagion untouched. This is not a surprise, given competitors loan mostly to crypto native companies while Goldfinch lends to lending companies in emerging markets. On paper, this appears to be a more diversified risk basket. TrueFi had defaults of just over $10M, a significant portion of its loan book.
Total borrowed amounts fell from $911M and $365M on Maple and TrueFi, respectively, in July to $30M and $8M today.
With a drastic decline in DeFi activity, decentralized stablecoins followed suit. From their respective peaks, FRAX supply fell by 65% to $1.0B, and DAI supply fell by 49% to $5.1B. With the general uncertainty surrounding the crypto markets towards the end of the year, it became evident that users valued stability and peace of mind above all. However, we still saw a fair amount of development in the decentralized stablecoin space, including rumblings of Curve’s upcoming crvUSD and Aave’s GHO stablecoin; Frax’s new lending protocol, liquid staking derivative, and bridge; and Maker’s move into real world asset (RWA) lending.
Curve and Aave Enter the Stablecoin Game
Protocol-native stablecoins mark a potentially profitable vector for DeFi primitives to venture into. A protocol could create its own overcollateralized stablecoin to increase revenue on loans outstanding from minting a stablecoin and even drive more utility to its own native token. With that being said, both Aave and Curve teased launches of their own native stablecoins, GHO and crvUSD, in the second half of the year.
Aave introduced GHO in July, where users will be able to deposit collateral to mint GHO. Staked AAVE holders will also receive a discount on the GHO borrow rate and mint price, bringing more utility to AAVE. The protocol anticipates that it will receive a substantial amount of fees from GHO to bolster its treasury.
In October, Curve released a whitepaper for its upcoming stablecoin. Curve’s design will enable users to mint crvUSD with collateralized LP tokens. The paper describes a lending-liquidating AMM (LLAMMA) that will internalize liquidations to mitigate risks of bad debt. For example, the AMM could gradually liquidate positions as collateral value decreases and gradually liquidate positions as collateral value increases. The design will also include a PegKeeper contract that will stabilize price through several automated monetary operations.
While neither protocol has officially deployed its stablecoin, GHO and crvUSD will be important narratives to keep an eye on in 2023.
After the fall of Terra, algostables caught a bad reputation in the market. FRAX, currently 92% collateralized by USDC, unfortunately fell into this basket of stigmatized assets. Sam Kazemian and his team continued to push through the bear market and shipped several key products that completed the protocol’s vision for a DeFi Trinity, where the FXS token governs a DEX, lending market, and a stablecoin. The team even took it a step further and created their own ETH liquid staking derivative, which will be discussed later.
As mentioned above, FRAX’s supply halved since the beginning of 2022, now weighing in at $1B. The stablecoin maintained its peg during every black swan event possible this year. Further, Frax utilized its unique control of Curve and Convex to drive deep liquidity to its FRAX base pool, which pairs FRAX against USDC and other stables to maintain peg stability and direct liquidity rewards. Participants can deposit LP tokens of their favorite stable pools on Convex to earn rewards (paid out in CVX, FXS, and CRV) ranging anywhere from 6% APY to 25% APY. This strategy will potentially help Frax scale its stablecoin in the future and drive more revenue to the protocol.
Fraxswap and Fraxlend provided ideal infrastructure through the latter half of 2022 for the team to exercise monetary policy, whether that be the $20M FXS purchase program announced in the summer or the minting of FRAX into Fraxlend pools to earn interest.
The protocol also introduced its own bridge, called Fraxferry, to handle all multi-chain operations in the future. After a plethora of bridge hacks throughout the year, this move will help the protocol protect itself from third party smart contract risk. The native bridge is slower than third party bridges, but this allows more time for malicious transactions to be caught and stopped. As documented in the project’s initial whitepaper, Frax’s FXS token emissions halved on Dec. 20th, bringing daily emissions down from 16,438 FXS to 8,219 FXS per day. Initially, Frax ecosystem yields will decrease, but the move will bring more scarcity to the governance token. With the amount of developer activity throughout 2022, the team has made it abundantly clear that they intend to continue towards their vision of becoming a trillion dollar stablecoin that scales with DeFi.
While DAI’s collateral has seen a change to more RWAs this year, the total DAI supply saw a large contraction, seeing a drop in supply of almost $4B or a ~40% decline from the end of 2021. The largest contractions came as a result of the Terra meltdown, which influenced the amount of trust in decentralized stablecoins. However, this continued throughout the rest of the year as the demand for leverage on assets fell along with asset prices and the attractiveness of DeFi yields versus U.S. treasuries.
In December, Maker increased the DAI savings rate to 1% as a result of boosted revenue through RWA strategies and as a plan to increase the demand for DAI. We can expect the DAI supply to begin expanding again once there is an increase for leverage on crypto asset collateral as well as appetite from institutions to deploy RWA lending strategies on-chain.
Liquid Staking Derivatives (LSDs) continued to see a rise in adoption, given ETH staking withdrawals have yet to be enabled. LSDs allow users a chance to earn staking rewards while keeping their assets liquid. Over the course of 2022 ~4.3M ETH, ~$5.6B at a $1300 ETH price, was deposited into liquid staking contracts. stETH continues to have primary market share with over 60% of all staking derivative deposits.
The newest LSDs over the last year have been Coinbase’s cbETH and Frax’s frxETH, which launched in June and October, respectively. cbETH is a rebase token that represents both the underlying ETH plus the rewards accrued from staking, similar to Rocketpool’s rETH. Given Coinbase’s previous ETH staking product and its popularity as an exchange, it has amassed almost 1M ETH in just over six months. Frax has a brand new model that uses two tokens: frxETH and sfrxETH. frxETH acts as a stablecoin against ETH, and users can deposit their ETH into Frax to receive frxETH in return. Users can then stake their frxETH into sfrxETH, which accrues the staking rewards from the ETH deposits staked on the beacon chain. This is meant to maximize yield earned, as sfrxETH stakers earn the yield from frxETH supply that is not being staked, and frxETH can take advantage of Frax’s tight relationship with Curve and Convex for yield on liquidity pools. In two months, the frxETH supply has quickly grown to 45k.
Heading into 2023, one of the primary objectives of Ethereum developers is to have ETH staking withdrawals enabled with a target date of March. This should therefore give the opportunity for those who have staked with staking derivatives to withdraw if they please, pending time in the withdrawal queue. One of the issues for staking derivatives throughout this year, primarily stETH, has been the ability to keep price parity with ETH due to the inability to directly arbitrage via withdrawals. This should therefore help alleviate price concerns while also giving users the ability to obtain their ETH if they so choose. However, this is contingent on two things: Each solution builds out the ability to withdraw, which has not yet been indicated, and the waiting period of the withdrawal queue, which is dependent on total ETH being unstaked at any period in time. We will surely get more information from LSD protocols as we get closer to March, and will be able to better gauge average exit queue timing once withdrawals are live.
The NFT marketplace landscape has undergone a significant shift throughout the tailend of this year as volumes plummeted following the craze seen during 2021 that carried into mid-2022. On a macro level, Ethereum remains the chain with the most liquidity and volume for secondary NFT marketplaces. It is also where most of the innovation is taking place between Sudoswap’s customizable bondings curves, Uniswap’s acquisition of Genie, LooksRare and X2Y2’s revenue share model with native token stakers, and the most recently launched Blur: a marketplace and aggregator that is tailored for serious traders with its portfolio analytics offering and low latency.
The reigning king of NFT marketplaces had a rough second half of 2022. Opensea started the year with a 98% market share over all volume traded on secondary, but has since seen its volume dominance drop to 30.8% after excluding volume that is flagged for wash trading. The first-mover still boasts the largest active user base of all marketplaces with over 130k weekly active users during the week ending on December 19. They have nearly reached 2.5M unique wallet addresses logging close to $34B of lifetime volume, which would equate to $850M of earnings for the company assuming a 2.5% take rate. Additionally, Opensea took a hard stance on supporting creator royalties and noted that creators on its platform earned over $1B over the course of 2022. Interestingly enough, the platform’s enforcement policy of NFT royalties, coupled with its high fees, likely drove traders to other venues.
The shiny new thing in NFT infrastructure is without a doubt Blur; the Paradigm-backed marketplace and aggregator designed for professional NFT traders. It is the first secondary venue to overtake Opensea in volume share. It also dominates aggregator market share despite Uniswap’s Genie acquisition that was integrated into its high-traffic front-end at the end of November. However, it pales in comparison to Opensea in terms of active users, with just 13.5k unique wallet addresses having interacted with its marketplace versus Opensea’s 130k for the week ending on December 19.
Blur launched with a 3 phase airdrop for the eventual BLUR token that rewarded users based on previous NFT purchases and listing on its marketplace during the first two rounds. The third and final round is ongoing, which rewards traders who place bids on collections in an effort to build up ample liquidity on the platform. While this tactic has proven successful thus far, it remains to be seen if its airdrop strategy will be successful after the incentives are paid out. Further, the dormant bids on NFT collections as a result of this scheme have created an artificial floor for NFT prices that will likely evaporate when the incentive program concludes. Traders have been vocal about their excitement around the product and what it offers, but only time will tell if the marketplace is able to retain a loyal user base or if all of the volume was made up of airdrop hunters.
A prime example of airdrop hunters can be found by examining Sudoswap. We wrote about its design extensively in a previous report, but the main innovation that Sudoswap pioneered was customizable bonding curves that enabled greater capital efficiency for NFT LPs, better price fills for buyers and sellers, and the ability to set limit orders to purchase or sell NFTs. The first of its kind marketplace was a big topic back in August, but after the SUDO airdrop allocation was announced traders disappeared. Daily volume traded and number of daily users are down 80-90% from the highs. While the sudoswap team created a novel design in the NFT space, they have failed to maintain any significant market share.
LooksRare and X2Y2 set a precedent when launching in the second week of 2022 by returning all platform trading fees to native token stakers. This is a powerful incentive mechanism because traders who use the platform can earn WETH by staking X2Y2 or LOOKS tokens and benefit from the volume/fees they generate for the marketplace. However, it has become quite clear that this scheme can be gamed via wash trading. Both teams continue to build and hold a 15-30% volume market share when including wash trading volume on any given week, but inflationary native tokens have put stress on their business models. If we exclude wash trading volume, that market share drops to 5-10%, a testament to how prominent artificial volume is in an NFT marketplace that redistributes revenue to token holders.
In our view, some of the largest markets for NFTs are in the gaming sector and integrations with web2 companies. To reaffirm the latter point, in the past six months Meta launched its NFT marketplace for Instagram users, Starbucks went forward with its beta rollout for its NFT loyalty program, Reddit launched a series of NFT collections, and Apple is slowly coming around to the idea of NFTs by providing more clarity around usage in its app store. Gaming, on the other hand, saw an explosion of interest in 2021 but the sector has been struggling throughout the bear market since Axie Infinity’s Ronin bridge was hacked for more than $600M. DeFi Kingdoms, another overly hyped play-and-earn game, has seen minimal adoption on its Avalanche Subnet deployment while its daily active users, in-game NFTs, and tokens trend toward zero. These are two areas we are watching closely, but for the past six months it has been ‘down only’ for the NFT sector.
Although protocols saw their own flavor of headwinds throughout the year, the continual development activity in the heat of a bear market paints an optimistic picture for 2023. While lending protocols saw bad debt and decentralized stablecoins lost their luster, DEXs and decentralized derivatives found their stride. Further, LSD protocols and NFT platforms stole the spotlight for unending growth and promise. Every year that the battle tested blue chip protocols survive enhances their chances for success. In a season of declining token valuations, 2023 will be a proving ground for dApp continuity and runways.
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