ON–033: DeFi

This is issue #33 of Our Network, the on-chain analytics newsletter that reaches almost 3500 crypto investors every week.

This week our contributors cover Aave, Balancer, Compound, Lending Rates, and Set Protocol.

Despite the Dai Savings Rate still sitting at 0%, Dai interest rates across the board have improved significantly since their initial decline following Black Thursday in March.

Many DeFi favorites are now offering attractive yields as 30 day averages for Compound, dYdX, and Aave lending rates sit between 4% and 7% APY. One of the biggest drivers behind protocols lifting off the 0% rate environment was Compound’s introduction of yield farming, as the mechanism boosted interest rates on the back of protocol users earning bonus COMP for liquidity provisions. This in turn forced other lending protocols to get competitive with rates. Compound is the only protocol on the board with a yield farming mechanism live but Aave will soon be joining the party with its upcoming Aavenomics token & governance upgrade. In terms of actual rates, Bitfinex offers the highest yield with its 30 day average sitting at 81%. However, given its centralized nature and questionable background, I wouldn’t hold too much weight here.

On the flip side, borrowing Dai from Maker is cheaper than ever. Anyone can use popular collateral like ETH, USDC, and WBTC to borrow Dai from the Maker protocol for 0% interest. Free lunch!

• Similar to Dai, USDC interest rates have recovered a fair amount as many DeFi protocols and crypto banks are now offering relatively attractive yields on USDC deposits. Nuo currently takes the cake as the lending protocol offers 11.41% APY on USDC deposits while popular US crypto bank BlockFi offers 8.6% APY. In terms of borrowing, Fulcrum, Compound, and dYdX all offer similar rates of 1.27%, 1.74%, and 1.88% APY, respectively. With that, Compound offers a bonus 7.99% APY in COMP for anyone who borrows USDC, effectively paying users to borrow capital from the protocol.

• While stablecoins tend to take the spotlight in the lending sector, it’s always interesting to see if there’s any attractive opportunities to earn a passive income on your idle ETH. The two places currently offering the highest yields on ETH are Bitfinex and BlockFi - both centralized crypto banks - with rates of 4.67% and 4.5% APY, respectively. In terms of DeFi protocols, Compound, Aave, and dYdX all offer minimal rates of 0.22%, 0.51%, and 0.23%, respectively. Compound also offers a bonus 0.55% APY in COMP tokens for anyone who provides ETH liquidity to the protocol. Looking forward, it will be interesting to see how ETH rates develop with the introduction of ETH2 Phase 0 in the coming months!

• Protocol Growth: The chart below shows the size of Aave’s money markets (Aave Market and Uniswap Market) in ETH from deposits and withdrawals. The value in the protocol has grown constantly since inception at the beginning of the year with this tendency continuing through the summer. The month of July has seen the total money market value double driven by a new Aave power user: yEarn. This is bound to continue as yEarn creates new vaults with aTokens and new arbitrage protocols emerge. (Source)

• Unique Lenders/Borrowers: Since May, Aave has welcomed many new participants in its ecosystem, peaking at over 6,000 lenders and nearly 2,000 borrowers in July. This illustrates the unique lenders and borrowers per month (plus August so far). (Source)

• Flash Loan Volume: Aave’s Flash Loan volume exploded in July reaching over $140 million dollars, mostly coming from DAI. This is a consequence of a market correction where Aave’s Flash Loans were used to swap collaterals on Compound and Maker via DeFi Saver’s tool. Flash Loans are uncollateralized loans that incur a 0.09% fee which is distributed to depositors or used to burn LEND. More about Flash Loans and DAI. (Source)

• Additional APY from Flash Loans: A closer look at DAI in the Aave Market can be found on Aave Watch -- note the impressive amount of Flash Loans which has greatly driven up the average deposit rate (a Flash Loan fee of 0.09% is taken from every Flash Loan, split between 70% to depositors, 30% to the protocol, and then from this 30%, 80% to burn and 20% to referrals). The average 30 day deposit rate for DAI is more than 6% higher than the borrow rate due to Flash Loans. (Source)

  

  And the below chart shows the accumulated amount of Flash Loan fees, reaching approximately $140K to date. In total, approximately $100K of the $140K Flash Loan fees has gone to the depositors. (Source)

  

• Since Balancer's mainnet launch on March 31st over $500,000,000 in cumulative volume has occurred. This volume has already generated over $6,000,000 in fees for liquidity providers. In early June Balancer was averaging less than $1,000,000 in daily volume with less than 100 unique traders. Now Balancer is averaging $10,000,000+ in daily volume with more than 1,000 unique traders. (Source)

• On July 25th Balancer had over $35,000,000 in volume due to the launch of $YFI. This occurred without $YFI being displayed on the Balancer exchange interface or being whitelisted for $BAL rewards. Despite this, hundreds of millions of dollars and over 1/3rd of the DAI supply was locked up in YFI's Balancer pool. This truly highlights the power of permissionless innovation. (Source)
• More teams are experimenting with liquidity mining programs on top of Balancer. These programs allow liquidity providers to receive $BAL rewards as well as additional protocol tokens. mStable launched the first program of this kind and now has $40,000,000+ in mUSD liquidity on Balancer. Uma has also recently launched a liquidity mining program that has brought in $15,000,000 of liquidity. Furthermore, protocols such as Aave and bZx implementing Balancer as part of their core infrastructure.

• Finally, Balancer's carbon voting system has launched and Over 300,000 BAL voted in the first three proposals which represents 34.5% of liquidity mining rewards from the first six weeks. The most recent wrap factor for soft-pegged pairs vote had a turnout of 350,000 BAL (25% of liquidity mining rewards from the first week weeks). (Source)

• Value locked in the Set Protocol vault is once again at all time highs (~$23.5mil) with almost all of the capital currently positioned in ETH, WBTC or LINK. This means that, collectively, all of the Sets are bullish on the market. You can see from the chart that this has been the case since early July with some of the capital briefly turning bearish in mid-July only to quickly rebalance back.

• The 20 Day MA Crossover Set (ETH20SMACO) was the first Trend Trading Set launched on the TokenSets platform way back in July of 2019. Since then, this Set has returned +76% against ETH which means that if you had put 10 ETH into this Set at launch, you would have 17.6 ETH today. The best part is that all of the trades were done automatically by an on-chain system - no human had any say in how this Set traded.

• Lifetime rebalance volume for Set Protocol is now at almost $150 million. All of these rebalances have settled completely on-chain and had participation from a wide range of entities including professional market makers and amateur traders. The larger rebalances - $7mil+ at a time - typically settle at around 0.25% to 0.5% slippage.