This article will prioritize the analysis of projects with better business development, wider moats, and more attractive valuations.
Authors: Alex Xu and Lawrence Lee
Introduction
As one of the oldest tracks in the cryptocurrency field, the performance of the Defi track in this round of bull market has not been satisfactory. The overall increase in the Defi sector over the past year (41.3%) not only lags far behind the average level (91%), but also lags behind Ethereum (75.8%).
Source: artemis
And if we only look at the data for 2024, the performance of the Defi sector is similarly difficult to be optimistic about, with an overall decline of 11.2%.
Source: artemis
However, in the author's view, in the peculiar market background where altcoins fell sharply after Bitcoin hit a new high, the Defi sector, especially its leading projects, may be experiencing the best layout moment since its inception.
Through this article, the author hopes to clarify the views on the value of Defi at the current moment by discussing the following questions:
The reasons why altcoins have significantly underperformed Bitcoin and Ethereum in this round
Why now is the best time to pay attention to Defi
Some Defi projects worth paying special attention to, as well as their sources of value and risks
This article does not cover all Defi projects with investment value. The Defi projects mentioned in this article are only used as examples for analysis and are not investment advice.
This article represents the author's interim thinking at the time of publication, and the views may change in the future. The opinions are highly subjective and may contain errors in facts, data, and reasoning. Criticism and further discussion from peers and readers are welcome.
The following is the main body of the article.
The mystery of the sharp decline in altcoin prices
In the author's view, the performance of altcoin prices in this round has not met expectations, and the internal reasons in the cryptocurrency industry are mainly threefold:
Insufficient demand growth: Lack of attractive new business models, with most tracks' PMF (product market fit) a long way off
Excessive supply growth: Further improvement in industry infrastructure, lowering the threshold for entrepreneurship, and excessive issuance of new projects
Continuous unlocking of tokens for low-circulation high-FDV projects, bringing heavy selling pressure
Let's take a look at the background of these three reasons separately.
Insufficient demand growth: The first round of the bull market lacking innovative narratives
In an article written by the author in early March, "Preparing for the primary wave of the bull market, my periodic strategy on this bull market cycle," the author mentioned that this round of bull market lacks business innovation and narratives of the same magnitude as Defi in 2021 and ICO in 2017. Therefore, the strategy should be to over-allocate to BTC and ETH (benefiting from the incremental funds brought by ETFs) and control the allocation ratio of altcoins.
So far, this view has been very accurate.
The lack of new business stories has led to a significant decrease in the inflow of entrepreneurs, industry investment, users, and funds, and more importantly, this situation has suppressed investors' overall expectations for industry development. When the market has not seen stories like "Defi will swallow traditional finance," "ICO is a completely new innovation and financing paradigm," and "NFT will disrupt the content industry ecosystem" for a long time, investors will naturally vote with their feet and move to places with new stories, such as AI.
Of course, the author does not support overly pessimistic views. Although there is no attractive innovation in this round, the infrastructure is constantly improving:
The cost of block space has dropped significantly, both for L1 and L2
Cross-chain communication solutions are gradually becoming more complete, with a rich list of options
User-friendly wallet experiences are being upgraded, such as Coinbase's smart wallet supporting quick creation and recovery without private keys, direct access to cex balances, and gas-free recharge, bringing users closer to the product experience of web2
Solana's Actions and Blinks features allow interactions with Solana's chain to be published to any common internet environment, further shortening the user's usage path
The above infrastructure is like water, electricity, coal, and roads in the real world. They are not the result of innovation, but they are the soil from which innovation emerges.
Excessive supply growth: Excessive issuance of projects + continuous unlocking of high market value tokens
In fact, from another perspective, although the prices of many altcoins have hit new lows for the year, the total market value of altcoins has not fallen very badly compared to BTC.
Data: Trading view, June 25, 2024
So far, the price of BTC has fallen by about 18.4% from its high, while the total market value of altcoins (displayed as Total3 in the Trading View system, representing the total cryptocurrency market value after deducting BTC and ETH) has only fallen by -25.5%.
Data: Trading view, June 25, 2024
The limited decline in the total market value of altcoins is set against the backdrop of a significant expansion in the total quantity and market value of altcoins. From the following chart, we can intuitively see that the growth trend of the number of tokens in this round of bull market is the most rapid in history.
New Tokens by Blockchain, Source: https://dune.com/queries/3729319/6272382
It should be noted that the above data only counts the issuance data of tokens on EVM chains, with over 90% issued on Base chains. In fact, more new tokens are contributed by Solana, and most of the newly issued tokens are memes.
Among the high market value representative memes that have appeared in this round of bull market are:
dogwifhat: 20.4 billion
Brett: 16.6 billion
Notcoin: 16.1 billion
DOG•GO•TO•THE•MOON: 6.3 billion
Mog Coin: 5.6 billion
Popcat: 4.7 billion
Maga: 4.1 billion
In addition to memes, a large number of infrastructure-type tokens are also being issued or will be issued this year, such as:
Layer 2 networks include:
Starknet: Circulating market value of 9.3 billion, FDV of 71.7 billion
ZKsync: Circulating market value of 6.1 billion, FDV of 35.1 billion
Manta network: Circulating market value of 3.3 billion, FDV of 10.2 billion
Taiko: Circulating market value of 1.2 billion, FDV of 19 billion
Blast: Circulating market value of 4.8 billion, FDV of 28.1 billion
Cross-chain communication services include:
Wormhole: Circulating market value of 6.3 billion, FDV of 34.8 billion
Layer0: Circulating market value of 6.8 billion, FDV of 27.3 billion
Zetachain: Circulating market value of 2.3 billion, FDV of 17.8 billion
Omni network: Circulating market value of 1.47 billion, FDV of 14.2 billion
Constructive services include:
Altlayer: Circulating market value of 2.9 billion, FDV of 18.7 billion
Dymension: Circulating market value of 3 billion, FDV of 15.9 billion
Saga: Circulating market value of 1.4 billion, FDV of 15 billion
*The above market value data is from Coingecko, as of June 28, 2024
In addition, a large number of tokens that have already been listed are facing a massive unlocking. Their common characteristics are low circulation ratio, high FDV, and early-stage institutional financing with very low token costs.
The softness of the demand side and narratives, combined with the excessive issuance of assets on the supply side, is a first in the cryptocurrency cycle. Although project teams have tried to maintain valuations by further reducing the token circulation ratio at the time of listing (from 41.2% in 2022 to 12.3%) and gradually selling to secondary investors, the resonance of the two ultimately led to an overall downward shift in the valuation center of these cryptocurrency projects. In 2024, only a few sectors such as Meme, Cex, and Depin maintained positive returns among the major sectors.
Ratio of new coin MC to FDV, image source: "Low Float & High FDV: How Did We Get Here?", Binance research
However, in the author's view, the collapse of the valuation center of high-market-value VC coins is a normal response of the market to various cryptocurrency anomalies:
Mass creation of ghost town Rollups, with only TVL and bots but no users
Providing similar solutions through the innovation of terms, such as a large number of cross-chain communication services
Entrepreneurship focused on hotspots rather than actual user needs, such as a large number of AI+Web3 projects
Difficulty in finding or simply not seeking a profit model, with tokens having no value capture
The collapse of the valuation center of these altcoins is the result of the market's self-repair, a benign process of bubble bursting, and a self-rescue behavior of funds voting with their feet and clearing the market.
In reality, most VC coins are not without value, they are just too expensive, and the market eventually brings them back to their rightful place.
The right time to focus on Defi: PMF products, emerging from the bubble period
Since 2020, Defi has officially become a category within the cluster of altcoins. In the first half of 2021, the most common category in the Top 100 cryptocurrency market value rankings was Defi projects, with a dizzying array of categories, vowing to redo all the existing business models in traditional finance on the chain.
In that year, Defi was the infrastructure of public chains, with DEX, lending, stablecoins, and derivatives being the essential four-piece set for new public chains.
However, with the over-issuance of homogeneous projects, a large number of hacker attacks (stealing from within), and TVL obtained through the Ponzi model of stepping on each other's feet, the token prices skyrocketed and then plummeted.
Entering this round of bull market cycle, the price performance of most surviving Defi projects has also been unsatisfactory, with fewer and fewer primary investments in the Defi field. Unlike the start of any bull market cycle, investors are most interested in the new stories that emerge in this round, and Defi does not belong to this category.
However, it is precisely because of this that Defi projects emerging from the bubble are starting to appear more attractive than other altcoin projects. Specifically:
- Business aspect: Mature business models and profit models, leading projects have moats
DEX and derivatives earn transaction fees, lending earns interest spread income, stablecoin projects earn stability fees (interest), and Staking services earn staking service fees, with clear profit models. The user demand for leading projects in each track is organic, having basically passed the user subsidy stage. Some projects still achieve positive cash flow after deducting token emissions.
Cryptocurrency project profit ranking, source: Tokenterminal
According to Tokenterminal's statistics, among the top 20 protocols with the highest profits as of 2024, 12 are Defi projects, categorized as:
Stablecoins: MakerDAO, Ethena
Lending: Aave, Venus
Staking services: Lido
DEX: Uniswap labs, Pancakeswap, Thena (revenue comes from front-end fees)
Derivatives: dYdX, Synthetix, MUX
Yield aggregation: Convex Finance
These projects have a variety of moats, some stemming from multilateral or bilateral network effects of services, some from user habits and branding, and some from special ecological resources. But from the results, the leading Defi projects in each track exhibit certain commonalities: stable market share, reduced competition from later entrants, and a certain pricing power for services.
The specific moats of individual Defi projects will be detailed in the project section of the third subsection.
- Supply aspect: Low emissions, high circulation ratio, small scale of tokens to be unlocked
As mentioned in the previous subsection, one of the main reasons for the continuous collapse of the valuation of altcoins in this round is the large number of projects based on high valuations with high emissions, and the negative expectations brought about by the massive unlocking of tokens entering the market.
However, due to the early launch time, most of the leading Defi projects have already passed the peak period of token emissions, and institutional tokens have been mostly released, with very low future selling pressure. For example, Aave currently has a token circulation ratio of 91%, Lido's token circulation ratio is 89%, Uniswap's token circulation ratio is 75.3%, MakerDAO's circulation ratio is 95%, and Convex's circulation ratio is 81.9%.
This not only indicates low future selling pressure but also means that anyone wanting to gain control of these projects can basically only purchase tokens from the market.
- Valuation aspect: Market attention and business data diverge, valuations fall to historical lows
Compared to new concepts such as Meme, AI, Depin, Restaking, and Rollup services, the attention to Defi in this round of bull market has been consistently thin, with average price performance. On the other hand, the core business data of various leading Defi projects, such as trading volume, lending scale, and profit levels, have continued to grow, resulting in a divergence between price and business, specifically reflected in the fact that the valuation levels of some leading Defi projects have reached historical lows.
Taking the lending protocol Aave as an example, its quarterly revenue (referring to net revenue, not overall protocol fees) has surpassed the previous high point of the previous cycle, reaching a historical high, while its PS (circulating market value/annualized revenue) has reached a historical low, currently only 17.4 times.
Data source: Tokenterminal
- Policy aspect: The FIT21 bill is favorable for Defi industry compliance and may trigger potential mergers and acquisitions
FIT21, the "Financial Innovation and Technology for the 21st Century Act," aims to provide a clear federal regulatory framework for the digital asset market, strengthen consumer protection, and promote the United States' leadership in the global digital asset market. The bill was proposed in May of the 23rd year and was passed with a high vote in the House of Representatives on May 22nd of this year. After the bill is officially passed, it will become more convenient for both startups and traditional financial institutions to invest in Defi projects as the bill clarifies the regulatory framework and rules for market participants. Considering the recent embrace of cryptocurrency assets by traditional financial institutions represented by BlackRock (pushing for ETF listings, issuing national debt assets on Ethereum), Defi is likely to be a focus area for them in the coming years. The fate and acquisition of traditional financial giants may be one of the most convenient options, and any related signs, even just the intention to acquire, will trigger a revaluation of the leading Defi projects.
Next, the author will analyze the business situation, moats, and valuation of some Defi projects, using some Defi projects as examples.
Noting the large number of Defi projects, the author will prioritize the analysis of projects with better business development, wider moats, and more attractive valuations.
Noteworthy Defi Projects
1. Lending: Aave
Aave is one of the oldest Defi projects. After completing financing in 2017, it transitioned from peer-to-peer lending (then called Lend) to a pool-based lending model. It surpassed the leading project Compound in the previous bull market cycle and is currently the first in the lending track in terms of market share and market value.
Aave's main business model is to earn interest spread income from lending. In addition, Aave launched its stablecoin GHO last year, which will generate interest income for Aave. Of course, operating GHO also means additional costs, such as promotion expenses and liquidity incentives.
1.1 Business Situation
For lending protocols, the most critical indicator is the active loan volume, which is the main source of income for lending projects.
The chart below shows Aave's market share of active loans over the past year. Aave's share of active loans has been continuously increasing over the past six months, reaching 61.1% currently. In fact, this ratio may be even higher, as the chart counts the loan volume of Morpho's revenue optimization module deployed on Aave and Compound.
Data source: Tokenterminal
Another key indicator is the protocol's profitability, i.e., profit level. As seen from the chart below, Aave's protocol profit has already pulled away significantly from other lending protocols and has long since moved away from stimulating business through token subsidies, as seen with Radiant in the chart (the purple portion represents it).
Data source: Tokenterminal
1.2 Moats
Aave's moats mainly include the following:
Continuous accumulation of security credit: Most new lending protocols experience security incidents within the first year of operation. Aave has operated without any smart contract-level security incidents to date. The accumulated security credit of a platform's risk-free and stable operation is often the most important factor for Defi users when choosing a lending platform, especially for large whale users with significant funds, such as Sun Yuchen, a long-term user of Aave.
Bilateral network effects: Like many internet platforms, Defi lending is a typical two-sided market, with deposit and borrowing users as supply and demand. The growth of one side of the deposit or borrowing scale stimulates the growth of the other side's business volume, making it more difficult for later competitors to catch up. In addition, the more abundant the platform's overall liquidity, the smoother the inflow and outflow of liquidity for deposit and borrowing sides, making it more attractive to large fund users and stimulating platform business growth.
Excellent DAO management level: The Aave protocol has fully implemented DAO-based management. Compared to team-centric management models, DAO-based management provides more comprehensive information disclosure and more extensive community discussions on important decisions. In addition, Aave DAO's community is active with a group of professional institutions with high governance levels, including top VCs, university blockchain clubs, market makers, risk management service providers, third-party development teams, and financial consulting teams, with diverse sources and active governance participation. From the operational results of the project, Aave, as a latecomer to pool-based lending services, has effectively balanced growth and security in product development and asset expansion, surpassing the older brother Compound, with DAO governance playing a key role in this process.
Multi-chain ecosystem positioning: Aave is deployed on almost all EVM L1\L2s and its TVL is basically at the top on each chain. In the upcoming V4 version of Aave, multi-chain liquidity chaining will be realized, making the advantage of cross-chain liquidity more prominent. See the specific image below:
In addition to EVM public chains, Aave is also evaluating Solana and Aptos, with the possibility of deployment on these networks in the future.
1.3 Valuation Level
According to Tokenterminal data, due to the continuous recovery of protocol fees and income, combined with the coin price still hovering at a low level, Aave's PS (the ratio of circulating market value to protocol income) and PF (the ratio of circulating market value to protocol fees) have both reached historical lows, with PS at 17.44 times and PF at 3.1 times.
Data source: Tokenterminal
1.4 Risks and Challenges
Although Aave's market share in the lending market continues to rise, a new competitor worth noting is Morpho Blue's modular lending platform. Morpho Blue provides a modular protocol for third parties intending to build a lending market, allowing them to freely choose different collateral, borrowing assets, oracles, and risk parameters to build a custom lending market.
This modular approach allows more market participants to enter the lending field and start providing lending services. For example, Gauntlet, a risk service provider for Aave, would rather interrupt its service relationship with Aave and launch its own lending market on Morpho Blue.
Image source: https://app.morpho.org/?network=mainnet
Data source: https://morpho.blockanalitica.com/
Morpho Blue has grown rapidly since its launch over half a year ago and has become the fourth largest lending platform in terms of TVL, following Aave, Spark (Aave v3 fork lending platform launched by MakerDAO), and Compound.
Its growth on Base is even more rapid, with a TVL of around $27 million in less than two months since its launch, while Aave's TVL on Base is around $59 million.
Data Source: https://morpho.blockanalitica.com/
2. Dexs: Uniswap & Raydium
Uniswap and Raydium belong to the Ethereum EVM ecosystem and the Solana ecosystem, respectively. Uniswap launched its V1 version on the Ethereum mainnet as early as 2018, but it was the V2 version launched in May 2020 that truly made Uniswap popular. Raydium, on the other hand, was launched on Solana in 2021.
The reason for recommending attention to two different targets in the Dexs track is that they belong to the two largest Web3 ecosystems, namely the Evm ecosystem built around the king of public chains, Ethereum, and the Solana ecosystem with the fastest user growth. Additionally, both projects have their own advantages and issues. Next, we will analyze these two projects separately.
2.1 Uniswap
2.1.1 Business Situation
Since the launch of the V2 version, Uniswap has almost always been the largest Dex in terms of trading volume share on the Ethereum mainnet and most EVM chains. In terms of business, we mainly focus on two indicators: trading volume and fees.
The chart below shows the monthly trading volume share of Uniswap V2 since its launch (excluding DEX trading volume on non-EVM chains):
Data Source: Tokenterminal
Since the launch of the V2 version in May 2020, Uniswap's market share has fluctuated from a peak of 78.4% in August 2020 to a low of 36.8% during the peak of the Dexs battle in November 2021, and has now rebounded to 56.7%. It has endured fierce competition and has firmly established its position.
Data Source: Tokenterminal
Uniswap's market share of trading fees has shown a similar trend, hitting a low of 36.7% in November 2021 and then steadily rising to the current 57.6%.
What's even more remarkable is that, except for a few months in 2020 (on the Ethereum mainnet) and at the end of 2022 (on the OP mainnet), during which Uniswap provided liquidity incentives, it has not incentivized liquidity for the rest of the time. Most Dexs, on the other hand, have not stopped subsidizing liquidity to this day.
The chart below shows the proportion of monthly incentive amounts for major Dexs. It can be seen that Sushiswap, Curve, Pancakeswap, and the ve (3,3) project Aerodrome on Base were once the projects with the largest subsidy amounts during the same period, but none of them have achieved a higher market share than Uniswap.
Data Source: Tokenterminal
However, the most criticized aspect of Uniswap is that despite not spending on token incentive payments, the tokens also do not capture value, and the protocol has not yet activated the fee switch.
However, at the end of February 2024, Erin Koen, the developer and governance lead of Uniswap, proposed an upgrade to the Uniswap protocol to enable the fee mechanism to reward UNI token holders who have authorized and staked their tokens. This proposal sparked much discussion in the community, and although it was scheduled for a formal vote on May 31st, it is currently delayed and has not yet been voted on. Nevertheless, the work to enable protocol fees and empower the Uni token has taken the first step, and the upgraded contracts have been developed and audited. In the visible future, Uniswap will have separate protocol income.
In addition, Uniswap Labs actually started charging users who trade using the official Uniswap frontend and Uniswap wallet in October 2023, at a rate of 0.15% of the transaction amount. The fees apply to trades involving ETH, USDC, WETH, USDT, DAI, WBTC, agEUR, GUSD, LUSD, EUROC, and XSGD, but stablecoin trades and WETH\ETH swaps are exempt from fees.
Just the frontend fees alone have made Uniswap Labs one of the highest-earning teams in the entire Web3 space.
It can be imagined that when the Uniswap protocol fee switch is activated, based on the annualized fee calculation for the first half of 2024, Uniswap's annualized fee would be approximately $1.13 billion. Assuming a protocol fee rate of 10%, the protocol's annualized revenue would be around $110 million.
After the launch of Uniswap X and V4 in the second half of this year, Uniswap is expected to further expand its market share of trading volume and fees.
2.1.2 Moats
Uniswap's moats mainly come from the following three aspects:
- User habits: At the beginning of Uniswap's frontend fee implementation, many people thought it was not a good idea and that users would quickly switch their trading behavior from Uniswap's frontend to aggregators like 1inch to avoid paying additional transaction fees. However, since the implementation of frontend fees, the revenue from the frontend has consistently increased, and its growth rate has even exceeded that of the entire Uniswap protocol fees.
Data Source: Tokenterminal
This data powerfully demonstrates the strength of Uniswap's user habits. Many users do not mind the 0.15% transaction fee and choose to maintain their trading habits.
Bilateral network effects: Uniswap, as a trading platform, is a typical two-sided market. From one perspective, the two sides of this market are buyers (traders) and liquidity providers (LPs). The more active the trading on one side, the more inclined LPs are to provide liquidity there, reinforcing each other. Another perspective on the two-sided market is that one side of the market is traders, and the other side is projects that deploy initial liquidity for their tokens. In order to make their tokens more easily accessible and tradable by the public, projects tend to deploy initial liquidity on Dexs where there are more users and are more well-known, rather than choosing relatively obscure second or third-tier Dexs. This behavior of the projects further reinforces the habitual trading behavior of users—new tokens are traded on Uniswap first, creating a mutually reinforcing two-sided market between "projects" and "trading users."
Multi-chain deployment: Similar to Aave, Uniswap is quite active in expanding to multiple chains. Uniswap's presence can be seen on EVM chains with significant trading volume, and its trading volume is generally among the top on the Dex rankings of those chains.
With the support for multi-chain trading after the launch of Uniswap X, Uniswap's comprehensive advantage in multi-chain liquidity will be further expanded.
2.1.3 Valuation
By using the ratio of Uniswap's market capitalization to its annualized fee, PF, as the main valuation standard, it can be observed that the valuation of the UNI token is currently in a historically high percentile range, perhaps reflecting the upcoming fee switch upgrade in its current market value level.
Data Source: Tokenterminal
In terms of market capitalization, Uniswap currently has a circulating market capitalization of nearly $6 billion, and a fully diluted market capitalization of up to $9.3 billion, which is also not low.
2.1.4 Risks and Challenges
Policy Risk: In April of this year, Uniswap received a Wells Notice from the SEC, indicating that the SEC will take enforcement action against Uniswap in the future. Of course, with the gradual progress of the FIT21 bill, DeFi projects like Uniswap are expected to obtain a more transparent and predictable regulatory framework. However, considering that the voting and implementation of this bill will take a considerable amount of time, the litigation from the SEC will exert pressure on the project's business and token price in the medium term.
Ecological Position: Dexs form the foundational layer of liquidity, and previously, their upstream was the trading aggregators. Trading aggregators such as 1inch, Cowswap, and Paraswap can provide users with price comparisons for full-chain liquidity and find the best trading path, to some extent, suppressing the ability of downstream Dexs to charge and price user transactions. Subsequently, with the industry's development, wallets with built-in trading functionality have become the infrastructure further upstream. In the future, with the introduction of intent-based models, Dexs as the source of underlying liquidity will become a layer that users are completely unaware of, which may further erode users' direct use of Uniswap and enter a complete "price comparison mode." Recognizing this, Uniswap is making efforts to move upstream in the ecosystem, such as vigorously promoting the Uniswap wallet and releasing Uniswap X to enter the trading aggregation layer to improve its ecological position.
2.2 Raydium
2.2.1 Business Situation
We will also focus on analyzing Raydium's trading volume, fees, and what sets Raydium apart from Uniswap is that it started protocol fees early and has a good protocol cash flow. Therefore, we also consider Raydium's protocol income as a key factor to examine.
First, let's look at Raydium's trading volume. Thanks to the prosperity of the current Solana ecosystem, its trading volume has been soaring since October last year, reaching $47.5 billion in March, accounting for 52.7% of Uniswap's trading volume for that month.
Data Source: flipside
In terms of market share, Raydium's share of trading volume on the Solana chain has been steadily climbing since September last year, currently accounting for 62.8% of the trading volume in the Solana ecosystem. Its dominance in the Solana ecosystem even exceeds Uniswap's position in the Ethereum ecosystem.
Data Source: Dune
The reason why Raydium's market share has risen from less than 10% during the low period to over 60% currently is mainly due to the meme trend that has continued in this bull market cycle. Raydium uses a combination of two types of liquidity pools, standard AMM and CPMM. The former is similar to Uni V2, with evenly distributed liquidity, suitable for high-volatility assets, while the latter is similar to V3's concentrated liquidity pools, allowing liquidity providers to customize the liquidity range, making it more flexible but also more complex.
Raydium's competitor, Orca, has chosen to fully embrace the concentrated liquidity pool model similar to Uni V3. For meme projects that need to produce and configure liquidity in large quantities every day, Raydium's standard AMM model is more suitable, making Raydium the preferred liquidity venue for meme tokens.
Solana, as the largest meme incubation base in this bull market cycle, has seen hundreds to thousands of new memes born every day since November this year. Meme has become a core driving factor in the prosperity of the Solana ecosystem, igniting Raydium's business.
Data Source: Dune
As shown in the above chart, in December 2023, Raydium had 19,664 new tokens created in a week, while Orca had only 89 during the same period. Although theoretically, Orca's concentrated liquidity mechanism can also choose to "fully configure liquidity" to achieve a similar effect to traditional AMM, it is still not as simple and direct as Raydium's standard pool.
In fact, Raydium's trading volume data also proves this point, with 94.3% of the trading volume coming from standard pools, and the vast majority of this trading volume is contributed by meme tokens.
In addition to the fee income, Raydium also charges for newly created pools. Currently, the fee for creating a standard AMM pool is 0.4 Sol, and for creating a CPMM pool, it is 0.15 Sol. Currently, Raydium receives an average of 775 Sol in pool creation fees per day (calculated at a price of 6.30 Sol, equivalent to about $10.8 thousand). However, this fee does not go into the treasury or towards the repurchase of Ray, but is used for protocol development and maintenance, and can be understood as team income.
Data Source: flipside
Like most Dexs, Raydium still has incentives for Dex liquidity. Although I did not find continuous tracking data for the incentive amount, we can roughly estimate the value of the incentives for the currently incentivized liquidity pools from the official liquidity interface.
According to the current incentive situation for Raydium's liquidity, there are approximately $48,000 worth of incentive payments per week, mainly in the form of Ray tokens. This amount is far less than the protocol's weekly income of nearly $800,000 (excluding pool creation income), indicating that the protocol is in a positive cash flow state.
2.2.2 Moat
Raydium is currently the largest Dex in terms of market trading volume on Solana. Compared to its competitors, its main advantage comes from the current bilateral network effects, similar to Uniswap, benefiting from the mutual reinforcement of business on both ends, i.e., traders and LPs, as well as the mutual reinforcement of project parties and trading users. This network effect is particularly prominent in the meme asset category.
2.2.3 Valuation
Due to the lack of historical data before 2023, the author only compares Raydium's valuation data for the first half of this year with the valuation data for 2023.
Despite the surge in trading volume this year, the valuation has still decreased significantly compared to last year, despite the increase in the price of Ray. In comparison to other Dexs such as PF and Uniswap, it is also at a relatively low level.
2.2.4 Risks and Challenges
Despite Raydium's strong performance in trading volume and income over the past six months, its future development still faces many uncertainties and challenges, specifically:
Ecological Position: Similar to Uniswap, Raydium also faces ecological positioning issues, and in the Solana ecosystem, aggregators such as Jupiter have a greater influence, with trading volume far exceeding that of Raydium (June's total trading volume for Jupiter was 28.2 billion, compared to Raydium's 16.8 billion). In addition, meme platforms such as Pump.fun are gradually replacing Raydium as the launch platform for projects, with more memes being launched through Pump.fun rather than Raydium, despite the current cooperation between the two. If this situation is not improved in the long term, if Pump.fun or Jupiter, located upstream in the ecosystem, builds its own Dex or turns to competitors, it will have a significant impact on Raydium.
Market Shift: Before the meme frenzy in Solana, Orca's market share of trading volume was seven times that of Raydium. However, Raydium's standard pool, which is more friendly to meme projects, allowed Raydium to regain its market share. But how long the meme trend in Solana will continue, and whether the chain will still be dominated by meme assets in the future, is difficult to predict. When the types of trading assets in the market shift, Raydium's market share may face challenges again.
Token Emission: Raydium's token currently has a circulation ratio of 47.2%, which is not high compared to most DeFi projects. The future selling pressure from unlocked tokens may put pressure on the price. However, considering that the project currently has good cash flow, selling tokens is not the only option, and the team may also choose to burn the unlocked tokens to dispel investor concerns.
High Centralization: Raydium has not yet initiated a governance process based on the Ray token, and the project's development is entirely controlled by the project party, which may prevent profits that should belong to token holders from being distributed. For example, the distribution of Ray tokens repurchased by the protocol is still undecided.
3. Staking: Lido
Lido is a leading liquidity staking protocol on the Ethereum network. The launch of the beacon chain at the end of 2020 marked the official start of Ethereum's transition from PoW to PoS. Since the withdrawal function for staked assets was not yet available at the time, staked ETH would lose liquidity. In fact, the Shapella upgrade, which allowed staked assets on the beacon chain to be withdrawn, occurred in April 2023, meaning that users who staked ETH earliest had been unable to access liquidity for two and a half years.
Lido pioneered the liquidity staking track. Users who deposit ETH into Lido receive stETH tokens issued by Lido. Lido incentivizes deep stETH-ETH LP on Curve, providing users with a stable service for "participating in ETH staking to earn rewards and being able to withdraw ETH at any time." It quickly developed and gradually became a leader in the Ethereum staking track.
In terms of business model, Lido receives 10% of its staking income, with 5% allocated to staking service providers and 5% managed by the DAO.
3.1 Business Situation
Lido's main business currently is ETH liquidity staking services. Previously, Lido was the largest liquidity staking service provider on the Terra network and the second largest on the Solana network. It also actively expanded its business to other chains such as Cosmos and Polygon. However, Lido wisely shifted its focus entirely to ETH network staking services. Currently, Lido is the leader in the ETH staking market and has the highest TVL among DeFi protocols.
Source: DeFiLlama
With the deep stETH-ETH liquidity incentivized by a large amount of $LDO, and investment support from institutions such as Paradigm and Dragonfly in April 2021, Lido surpassed centralized exchanges (Kraken and Coinbase) at the end of 2021, becoming the leader in the Ethereum staking track.
Lido spent approximately $280 million in total from 2021 to 2022 to incentivize stETH-ETH liquidity. Source: Dune
However, discussions arose about whether "Lido's dominance will affect the decentralization of Ethereum." Internally, the Ethereum Foundation is also discussing whether it is necessary to limit the staking share of a single entity to no more than 33.3%. After reaching a high point of 32.6% in May 2022, Lido's market share has fluctuated between 28% and 32%.
Historical market share of ETH staking (light blue block at the bottom is Lido). Source: Dune
3.2 Moat
Lido's business moat mainly consists of the following two points:
Stable expectations brought about by its long-term market leadership position, making Lido the first choice for whales and institutions to enter ETH staking. Users such as Justin Sun, Mantle before issuing its own LST, and many whales are all Lido users.
Network effects brought about by the widespread use cases of stETH. stETH has been fully supported by leading DeFi protocols as early as 2022, and subsequently developed DeFi protocols have been trying to attract stETH (such as the once popular LSTFi project in 2023, as well as Pendle and various LRT projects). The position of stETH as the basic income asset of the Ethereum network is relatively stable.
3.3 Valuation Level
Although Lido's market share has experienced a slight decline, Lido's staking scale continues to rise with the increase in ETH's staking ratio. In terms of valuation indicators, Lido's PS and PF have recently hit historical lows.
Source: Token Terminal
With the successful launch of the Shapella upgrade, Lido's market position has been solidified, and the profit indicator reflecting "income-token incentives" has also performed well, with a total profit of $36.35 million in the past year.
Source: Token Terminal
This has also sparked community expectations for adjustments to the $LDO economic model. However, the actual leader of Lido, Hasu, has stated more than once that compared to the current expenses, the income from the community treasury cannot sustain all of Lido DAO's expenses in the long term, and it is premature to allocate income.
3.4 Risks and Challenges
Lido faces the following risks and challenges:
Competition from newcomers. Since the launch of Eigenlayer, Lido's market share has been declining. Any new project with a sufficient token marketing budget could become a competitor to Lido, which has a leading advantage but has tokens that are close to full circulation.
Long-term doubts from the Ethereum community, including some members of the Ethereum Foundation, about Lido's high market share in staking. Previously, Vitalik had written specifically about this issue and outlined various solutions, but he did not express a clear preference for any solution in the article (Mint Ventures specifically analyzed this issue in a dedicated article in November last year, and interested readers can go there to check it out).
The SEC's charges against Consensys on June 28, 2024 explicitly defined LST as a security, and the act of users minting and purchasing stETH was considered "Lido's issuance and sale of unregistered securities," and Consensys was also accused of "issuing and selling unregistered securities" for providing users with the service of staking ETH to Lido.
4. Perpetual Contract Exchange: GMX
GMX is a perpetual contract trading platform that officially launched on Arbitrum in September 2021 and on Avalanche in January 2022. Its business is a bilateral market: on one side are traders who can engage in leveraged trading of up to 100x, and on the other side are liquidity providers who offer their assets' liquidity for traders to trade and act as counterparties to traders.
In terms of the business model, GMX's income comes from trading fees ranging from 0.05% to 0.1% charged to traders, as well as funding fees and borrowing costs. GMX allocates 70% of all income to liquidity providers, with the remaining 30% distributed to GMX stakers.
4.1 Business Situation
In the field of perpetual contract trading platforms, due to the frequent emergence of new projects with retroactive airdrops of tokens (such as Aevo, Hyperliquid, Synfutures, Drift, etc.), and the widespread existence of similar trading mining incentives in old projects (such as dYdX, Vertex, RabbitX), the data on trading volume is not very representative. We will use TVL, PS, and profit indicators to compare GMX with its competitors.
In terms of TVL, GMX currently ranks first, but the TVL of established derivatives protocols such as dYdX, Jupiter Perp with a large flow of traffic on Solana, and the unreleased Hyperliquid are also in the same range.
Data Source: DeFiLlama
From the PS indicator perspective, among projects that have issued tokens, focus on perpetual contract trading as their main business, and have a daily trading volume of over $30 million, GMX's PS indicator is relatively low, only higher than Vertex, which still has high trading mining incentives.
In terms of the profit indicator, GMX's profit in the past year was $6.5 million, which is lower than DYDX, GNS, and SNX. However, it is worth noting that this is largely due to GMX releasing all of the 12 million ARB tokens it received during the STIP activity on Arbitrum from November last year to March this year (equivalent to an average of about $18 million based on the price of ARB during that period), leading to a significant decrease in profit. We can see GMX's strong profit-making ability from the slope of profit accumulation.
4.2 Moat
Compared to other DeFi projects mentioned above, GMX's moat is relatively weak. The frequent emergence of new derivative trading exchange projects in recent years has largely impacted GMX's trading volume, and the track is still quite crowded. GMX's main advantages include:
Strong support from Arbitrum. As a native project of the Arbitrum network, GMX contributed nearly half of the TVL on the Arbitrum network at its peak. At that time, almost all new DeFi projects on Arbitrum were "developed for GLP." In addition to gaining exposure from the Arbitrum official, GMX also received a large number of ARB tokens in various ARB incentive activities (initial airdrop of 8 million tokens, STIP of 12 million tokens), enriching GMX's treasury and providing valuable marketing budget for GMX, which has already fully circulated.
Positive image brought by long-term industry leadership. From the second half of 2022 to the first half of 2023, GMX led the narrative of "real yield DeFi," which was a rare highlight in the bearish DeFi market at that time. GMX took this opportunity to build a good brand image and accumulate a loyal user base.
Certain scale effect. Platforms like GMX have scale effects because only with a large LP scale can they accommodate larger trading orders and higher open interest, and higher trading volume can in turn provide higher returns to LPs. As a leading on-chain derivatives trading platform, GMX benefits from this scale effect. For example, the well-known trader Andrew Kang has opened long and short positions worth tens of millions of dollars on GMX for a long time. At that time, GMX was almost his only choice for opening such large position orders on-chain.
4.3 Valuation Level
GMX is currently fully circulated. We have already conducted a horizontal comparison with peers, and GMX currently has the lowest valuation among mainstream derivatives exchanges.
Compared with historical data, GMX's revenue situation is relatively stable, and the PS indicator historically ranks in the medium to low range.
4.4 Risks and Challenges
Strong competitors. GMX's competitors include not only established but still active DeFi protocols like Synthetix and dYdX, but also various emerging protocols. For example, AEVO, a token exchange, and Hyperliquid, which has not yet issued tokens, have gained considerable trading volume and exposure in the past year. Jupiter Perp, which has a large flow of traffic on Solana, has achieved a TVL close to GMX and trading volume surpassing GMX with a mechanism almost identical to GMX's. GMX is also preparing to expand their V2 version to Solana, but the overall competition in the field is very fierce, and there is no relatively certain pattern as in other DeFi tracks. The common trading mining incentives in the industry also reduce user switching costs, and user loyalty is generally low.
GMX uses oracle prices as the basis for transaction and settlement, which poses the risk of oracle attacks. In September 2022, GMX suffered a loss of $560,000 due to an attack on the AVAX oracle on the Avalanche network. Of course, for most assets tradable on GMX, the cost of an attack (manipulating the price of the corresponding token on a CEX) is much higher than the potential profit. The V2 version of GMX has also made targeted efforts to address this risk through isolation pools and trading slippage.
5. Other Notable DeFi Projects
In addition to the aforementioned DeFi projects, we have also researched other notable DeFi projects, such as the established stablecoin project MakerDAO, the emerging star Ethena, and the leading oracle provider Chainlink, among others. However, due to space constraints, we cannot present all of these projects in this article. Furthermore, these projects also face many challenges, such as:
MakerDAO, despite still being the decentralized stablecoin leader and having a large number of "natural holders" who hold DAI just like they hold USDC and USDT, has seen its stablecoin scale stagnate, with a market value only about half of the previous peak. Its collateral largely consists of off-chain dollar assets, gradually undermining the decentralized credit of its token.
In stark contrast to DAI from MakerDAO, the stablecoin USDe from Ethena has seen rapid growth, reaching $3.6 billion in just about six months. However, Ethena's business model (a public fund focused on perpetual contract arbitrage) still has a clear ceiling. The massive expansion of its stablecoin is based on the premise that secondary market users are willing to buy its token ENA at a high price, providing substantial subsidies to USDe. This somewhat Ponzi-like design is susceptible to negative business and token price spirals in unfavorable market sentiment. The key turning point for Ethena's business lies in USDe becoming a decentralized stablecoin with a large number of "natural holders," at which point its business model will have completed the transition from a public arbitrage fund to a stablecoin operator. However, considering that most of USDe's underlying assets are held in arbitrage positions on centralized exchanges, USDe lacks both "decentralized resistance to censorship" and "strong endorsement from credit institutions," making it difficult for it to replace DAI and USDT.
After the DeFi era, Chainlink is preparing to usher in a hidden but impending narrative, driven by traditional financial giants such as BlackRock, which have gradually embraced Web3. In addition to promoting the listing of BTC and ETH ETFs, BlackRock's most noteworthy move this year is the issuance of a USD government bond fund with the code "Build" on Ethereum, with the fund size exceeding $380 million in six weeks. The subsequent experiments of traditional financial giants in on-chain financial products will continue to face challenges such as tokenization of off-chain assets and on-chain/off-chain communication and interoperability. Chainlink's exploration in this area is quite advanced. For example, in May of this year, Chainlink completed a pilot project on "Smart Net Asset Value" (Smart NAV) with the Depository Trust & Clearing Corporation (DTCC) and several major financial institutions in the United States. The project aims to establish a standardized process to collect and disseminate net asset value (NAV) data for fund assets on private or public blockchains using Chainlink's interoperability protocol CCIP. In addition, in February of this year, asset management company Ark Invest and 21Shares announced the verification of holdings data through integration with Chainlink's reserve proof platform. However, Chainlink still faces the problem of the disconnect between business value and token value. The lack of value capture and rigid application scenarios for the Link token raises concerns about the difficulty for holders to benefit from the growth of its parent company's business.
In conclusion
Just like the development process of many revolutionary products, after its emergence, DeFi also went through the narrative fermentation of the year 2020, the rapid bubble of asset prices in 2021, the disillusionment stage after the bursting of the bubble in the bear market of 2022, and is currently emerging from the trough of narrative disillusionment, using actual business data to build its intrinsic value.
I believe that as a rare track in the crypto field with a mature business model and continuously expanding market space, DeFi still has long-term attention and investment value.
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