How DeFi on Ethereum is evolving through Crypto Winter

Key points to remember

  • DeFi has suffered from the crypto crisis, but many grassroots 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 prominent DeFi protocols are taking advantage of the current market downturn to redesign their governance structures or offer entirely new services. Others have focused on strengthening their operations to improve resilience.

Planning DeFi projects for the future

DeFi protocols continue to grow despite the continued decline of the crypto market.

Projects showing signs of evolution include Ethereum DeFi mainstays 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 financial stack of the ecosystem due to their technical innovations, high security, and amount of capital entrusted to their smart contracts.

While the market downturn exposed the weaknesses of decentralized finance, notably through the collapse of the Terra blockchain and its algorithmic stablecoin UST, these so-called “blue chips” seem to be weathering the current storm and have continued to rise. develop their protocols and even expand their offerings. Rejoin Crypto Briefing as we take a look at some of the most notable DeFi updates of recent 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 to invest DAI500 million of its cash in US Treasury bills and corporate bonds with the aim of generating returns while diversifying its holdings.

MakerDAO also has voted for to allow Huntingdon Valley Bank, a fully regulated Pennsylvania-based bank, to borrow up to 100 million DAI against off-chain collateral, marking the first time a traditional financial institution has taken a loan from a protocol Challenge. Additionally, MakerDAO already operates five other real-asset vaults and plans to add more in the future.

The recent advancement of the protocol’s product offerings has led to another proposal on the MakerDAO forum to create a new advisory board to fully research and later educate MKR token holders on future proposals. The proposal was narrowly rejected in a hotly contested vote that saw over 30% of committed MKR supply vote, a record in DeFi governance. Still, the near-approval of the vote suggests that attitudes toward the extreme decentralization initiated by the DAO’s governance structures may be changing.

Uniswap expands 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 needing to trust a third party. They can also earn yield by providing liquidity to the exchange’s various trading pairs. According Defi Llama data, the protocol currently holds over $4.8 billion in total value locked on the Ethereum mainnet, Arbitrum and Optimism layer 2 networks, and Polygon and Celo.

The protocol announcement last month it had acquired Genie, a market aggregator for NFTs. Genie pulls listings from all major Ethereum marketplaces like OpenSea and LooksRare, and also offers bulk buying through an optimized smart contract to reduce transaction fees. The Genie integration will likely allow Uniswap to offer users a wider range of NFT purchasing options than any single marketplace.

Although this is not the protocol’s first foray into NFTs (Uniswap previously pioneered NFT liquidity pools with Unisocks, and later adopted NFTs to represent liquidity provider positions in Uniswap V3 ), the integration of Genie signals a significant expansion of Uniswap’s product offerings. NFT trading is expected to be enabled on the Uniswap web application in the future.

Beyond NFTs, the Uniswap governance forum is also currently discussing an idea suggested by Ethereum co-founder Vitalik Buterin to turn the UNI token into a price oracle token to ensure the robustness of Ethereum’s stablecoin ecosystem.

Aave Discusses Launching Its Own Stablecoin

Despite the market downturn, Aave also has its sights set 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 “enablers”, DAO-approved entities that can generate or burn GHO in a trustless manner. Representatives of other DeFi protocols, such as the Frax protocol and Yeti Finance, were among those who offered to take on facilitating roles, although the structure has yet to be fully defined.

Lido experiments with governance

Like MakerDAO, decentralized staking service provider Lido is also wondering if the standard token-voting DAO governance model best suits its needs.

Lido has grown rapidly with the protocol being processed more than 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 earning staking returns of between 4-5%.

Lido’s growing ETH market share has questions asked if the platform has inadvertently made Ethereum more centralized. The DAO discussed the idea of ​​self-limiting Lido’s potential market share before decide against such a proposal.

The Lido is however considering a new governance model that would essentially create a “checks and balances” dynamic between holders of stETH and LDO, Lido’s governance token. Under the dual governance model, stETH holders would have veto and anti-veto powers over proposals submitted by LDO holders. The mechanism would make taking over governance much more difficult, while aligning the interests of stETH and LDO holders.

DeFi tokens are lagging behind

Although many DeFi protocols appear to be making progress in governance, the space has been suffering from weak price action for over a year.

Most major DeFi governance tokens peaked in May 2021 and the ecosystem effectively entered a bear market as NFTs booming and liquidity was flowing into the crypto ecosystem throughout the second half of 2021. The global economic downturn of 2022 only accelerated the decline. Governance tokens from MakerDAO, Uniswap, Aave, and Lido are all more than 75% below their highs at press time.

Interestingly, many DeFi tokens have underperformed even though their protocols generate significant profits through user fees. According to data from Token Terminal, Uniswap earned $45.2 million in the last 30 days, Aave $9.3 million, ManufacturerDAO $1.9 million, and Swimming pool $17.6 million.

Although these projects continue to be used, their governance tokens currently do not capture any of the revenue they generate. Lack of value accumulation impacts token holders, but it can also lead to governance capture. If the price of a governance token drops significantly, a the malicious actor can be incentivized to acquire a large part of the supply and Obligate a vote in favor of transferring protocol funds to themselves.

The issue of value accumulation has been raised unsuccessfully in several DeFi governance forums, most recently on Uniswap and Swimming pool. Notably, Yearn.Finance stood out with a plan to install a redemption mechanism to support its token price, but YFI holders have yet to collect the protocol fee.

What’s next for DeFi?

After a spectacular run in 2020, DeFi fell into disuse in 2021 as Ethereum and other Layer 1 networks took center stage during the crypto market rally. While many DeFi tokens hit new highs in May 2021, most suffered steep dollar and Ethereum losses in recent months. Nevertheless, recent developments in Ethereum’s major DeFi communities show that the ecosystem is changing. If DeFi finally returns to its former glory, projects built during the current winter phase should be the ones to reap the benefits.

Disclosure: At the time of writing this article, the author of this article owned ETH and several other cryptocurrencies.

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