The central theses
- DeFi has suffered from the crypto slump, but many major projects are still under construction.
- Companies like Aave, MakerDAO, Uniswap, and Lido have all presented experimental governance proposals or made major announcements in recent months.
- If DeFi is to reclaim its highs, those building through the bear should emerge stronger than ever.
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Some of Ethereum’s most well-known DeFi protocols are taking advantage of the current market downturn to rethink their governance structures or offer entirely new services. Others have focused on bolstering their operations to improve resilience.
DeFi projects are planning for the future
DeFi protocols continue to expand despite the ongoing crypto market decline.
Notable among the projects showing signs of development are the mainstays of Ethereum DeFi such as lending protocols MakerDAO and Aave, popular decentralized exchange Uniswap, and leading Ethereum liquid staking platform Lido. These protocols, along with a few others such as Curve and Compound, are considered fundamental to the ecosystem’s financial stack due to their technical innovations, strong security, and the amount of capital entrusted to their smart contracts.
While the market downturn has exposed weaknesses in decentralized finance, most notably with the collapse of the Terra blockchain and its UST algorithmic stablecoin, these so-called “blue chips” appear to be weathering the current storm, evolving their protocols and even expanding their offerings. Join the Crypto Briefing as we take a look at some of the most notable DeFi updates over the past few months.
MakerDAO integrates traditional finance
The first project on our list is the decentralized stablecoin issuer MakerDAO. The protocol allows users to lock up volatile assets as collateral to mint the dollar-pegged DAI stablecoin.
The protocol has been making waves lately, especially for its DAOs recent decision Invest 500 million DAI from its treasury in US Treasury bills and corporate bonds to generate yield while diversifying its holdings.
MakerDAO has too voted for it to allow Huntingdon Valley Bank, a fully regulated Pennsylvania-based bank, to lend up to 100 million DAI against off-chain collateral, marking the first time a traditional financial institution has borrowed from a DeFi protocol . In addition, MakerDAO already operates five other real-world asset vaults and plans to add more in the future.
The recent evolution of the protocol’s product offering has prompted another suggestion on the MakerDAO forum to create a new advisory board responsible for fully researching and subsequently educating MKR token holders on future proposals. The suggestion was narrowly rejected in a hotly contested vote that saw more than 30% of MKR supply pledge to vote, a record in DeFi governance. Still, the near-acceptance of the vote suggests that attitudes toward the extreme decentralization that has been promoted by DAO governance structures may be changing.
Uniswap extends to NFTs
Another notable development in the DeFi space comes from Uniswap, the world’s largest decentralized exchange. Uniswap allows users to trade tokens without having to trust a third party. They can also generate returns by providing liquidity to the exchange’s various trading pairs. Corresponding Data from Defi Llama, The protocol currently holds a combined value of more than $4.8 billion locked across the Ethereum mainnet, Layer 2 networks Arbitrum and Optimism, and Polygon and Celo.
The protocol announced last month for acquiring Genie, a market aggregator for NFTs. Genie sources listings from all major Ethereum marketplaces such as OpenSea and LooksRare and also offers bulk purchases via an optimized smart contract to reduce transaction fees. The Genie integration will likely result in Uniswap offering users a wider range of NFT buying options than any single marketplace.
While this isn’t the protocol’s first foray into NFTs (Uniswap previously developed NFT liquidity pools using Unisocks and later adopted NFTs to represent liquidity provider positions in Uniswap V3), the Genie integration signals a significant expansion of Uniswap’s product offering. NFT trading is scheduled to be enabled on the Uniswap web app sometime in the future.
In addition to NFTs, there is also the Uniswap Governance Forum currently discussed an idea proposed by Ethereum co-founder Vitalik Buterin to turn the UNI token into a price oracle token to ensure the resilience of Ethereum’s stablecoin ecosystem.
Aave talks about launching its own stablecoin
Despite the market downturn, Aave also has an eye on the future. The lending platform is is currently considering a proposal to launch its own decentralized stablecoin called GHO.
To mint GHO, users would need to deposit collateral in Aave Vaults, similar to how DAI is minted on MakerDAO. However, Aave would differ from MakerDAO’s approach by introducing “intermediaries,” DAO-approved entities that can generate or burn GHO in a trustless manner. Representatives from other DeFi protocols, such as the Frax protocol and Yeti Finance, were among those who offered to fill moderator roles, although the structure is not yet fully worked out.
Lido experiments with governance
Like MakerDAO, decentralized staking service provider Lido is questioning whether the standard token-voting DAO governance model best suits its needs.
Lido has seen rapid growth as the protocol is now being processed over 30% of all ETH staked. Users can stake their ETH through Lido to receive stETH tokens, which can then be used as collateral in various DeFi protocols while still earning staking returns of between 4% and 5%.
Lido’s growing ETH market share asked questions about whether the platform inadvertently made Ethereum more centralized. The DAO discussed the idea of capping Lido’s potential market share beforehand decide against it such a suggestion.
However, Lido is in view of a new governance model that would essentially create a “checks and balances” dynamic between holders of stETH and of LDO, Lido’s governance token. Under the dual governance model, stETH holders would be given veto and anti-veto powers over proposals submitted by LDO holders. The mechanism would make a governance takeover significantly more difficult while aligning the interests of stETH and LDO holders.
DeFi tokens lag behind
Although many DeFi protocols appear to be making strides in governance, the space has been suffering from weak price action for more than a year.
Most major DeFi governance tokens peaked in May 2021 and the ecosystem effectively entered a bear market as NFTs boomed and liquidity flocked to the crypto ecosystem in the second half of 2021. The global economic downturn of 2022 only accelerated the decline. MakerDAO, Uniswap, Aave, and Lido governance tokens are all over 75% off their highs at press time.
Interestingly, many DeFi tokens have underperformed despite their protocols generating significant profits from user fees. According to Token Terminal data Uniswap made $45.2 million in the last 30 days, Spirit $9.3 million MakerDAO $1.9 million and Lido $17.6 million.
While these projects continue to be used, their governance tokens do not currently track any of the revenue they generate. The lack of value appreciation impacts token holders, but it can also lead to governance conquest. If the price of a governance token suffers a significant decline, a malicious actors can be incentivized to acquire a large part of the supply and Makes a vote to transfer protocol funds to itself.
The issue of value appreciation has been raised to no avail on several DeFi governance forums, most recently on Uniswap and Lido. In particular, Yearn.Finance has come up with a plan To install a buyback mechanism to support the token price, but YFI holders have yet to earn log fees.
What’s next for DeFi?
After a spectacular run in 2020, DeFi went out of fashion in 2021 as Ethereum and other Layer 1 networks took center stage during the crypto market rally. While many DeFi tokens rallied to new highs in May 2021, most have suffered brutal losses in dollars and Ethereum over the past few months. Nonetheless, recent developments in Ethereum’s leading DeFi communities show that the ecosystem is evolving. When DeFi finally returns to its former glory, the projects being built during the current winter phase should bear fruit.
Disclosure: At the time of writing, the author of this article owned ETH and several other cryptocurrencies.
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