Future of DeFi: Top 7 Trends Based on Analyzing 25 Protocols
The 2022 crypto bear market has come abruptly and is now in full swing. Yet most of DeFi tokens are even in a worse shape than BTC or ETH.
DeFi tokens have been dropping in price against ETH since at least October 2020. DeFi Pulse Index, which tracks major DeFi tokens, has dropped 69% against ETH just in the past year alone.
Most of the underperformance against ETH can be explained by highly inflationary design of DeFi tokenomics and lack of protocol revenue redistribution to the token holders. For example, Uniswap’s UNI token only serves as a governance token and 0% of its generated fees are distributed to the UNI holders.
In contrast, Ethereum validator staking is yielding ~4.2% on ETH at the time of writing. Additionally, thanks to ETH fee burning mechanism, ETH inflation is low or (on some days) negative.
In light of this, I ventured to analyze the roadmaps of 25 major DeFi protocols to see what’s next in the pipeline. As you will see, many of them are redesigning their tokenomics, working on building protocols more efficient with new iterations and seeking to further decentralize their points of failure.
What’s next for DeFi in the near future?
For the research I analyzed 25 major DeFi protocols.
A few large market cap protocols have been excluded in the final evaluation as they had no information on the next steps, lacked explanation on why the roadmap is missing or community was not responsive to questions on Discord.
You can check the full list of projects, roadmap details, timeline and the information source in the table below.
I‘ll update the table as more details emerge and if you would like to contribute to the research, feel free to reach out to @DeFiIgnas on Twitter.
Top 7 trends
1. Growth of Protocol-owned-stablecoins
If you checked the table you might get surprised that Shiba Inu is included in the analysis. Isn’t a meme coin?
Interestingly, Shiba has been building a full DeFi ecosystem around its Shiba brand that includes their own Layer 2 blockchain, Shibaswap exchange, the Metaverse and their own stablecoin SHI.
Shiba is not alone in their stablecoin ambitions. Following recent launches of NEAR, Tron, Waves blockchain stablecoins, DeFi protocols Aave and Curve are planning to launch their own stablecoins too.
While not much official information is available for Curve USD, Aave has already revealed its GHO stablecoin mechanics.
Protocol-owned-stablecoins (POSCs) add a new source of revenue to the protocol, brings additional use cases for the token, increases its demand, and boosts generated yield to liquidity providers.
If POSCs get widely adopted, it should attract more capital to the protocol as LPs can now liberate locked capital and extract value outside of the native protocol.
2. Increased adoption of veTokenomics
Curved finance pioneered so-called veTokenomics, where token holders stake their tokens for a period of time in order to generate higher yield for themselves and vote on liquidity mining distribution.
To learn more about how veTokenomics works and why its needed check my latest thread.
The model creates skin in the game and discourages mercenary farming when liquidity mining token rewards are instantly sold. More projects are choosing veTokenomics:
- Yearn Finance is expected to launch veYFI with a 4-year locking in mid August. The locked tokens will not be transferable.
- Synthetix will use veSNX gauges for inflation weighting.
- Pancakeswap too will roll out vCAKE for rewards weight voting ‘soon’.
I wouldn’t be surprised if Compound Finance transitioned to veTokenomics as well in the future, as they stopped liquidity mining altogether due to mercenary farming.
Finally, it’s worth noting that veTokenomics attracts ‘aggregation’ layer protocols such as Convex for Curve and Aura Finance for Balancer. We can expect this kind of aggregator protocols to launch for veSNX, veYFI and vCAKE too.
3. Focus on Progressive decentralization
In 2020 a16z wrote an influential guide on Progressive Decentralization for crypto applications that is still very relevant in 2022.
As projects establish product/market fit, financial sustainability, a participatory community and regulatory compliance, they should seek to reduce their single point of failure — centralization.
In this spirt explicit roadmaps have been announced by quite a few protocols:
- dYdX announced v4 with the mission to fully decentralize the protocol. It includes a fully decentralized, off-chain, orderbook and matching engine.
- The Graph is working to ‘Sunsetting the Hosted Service’ that will migrate all the centralized Hosted Services to the decentralized network. Expected to migrate in Q1 2023.
- Ren is gradually decentralizing the RenChain as it’s currently mostly centralized.
- Lido voted not to limit the amount of staked ETH, but plans to decentralize by adopting Distributed Validator Technology.
- Maker’s ambitions to decentralization are evident by recently rejecting a ‘governing council’ vote and by announcing the End Game Roadmap. The proposal includes creating MetaDAOs (subsection of MakerDAO each governed by their own token).
4. Launching new iteration upgraded protocols
Crypto and DeFi moves fast. You either adapt fast to the changes or get left behind.
In order to keep up with the fast pace market, several protocols are about to launch significant upgrades to how their protocols work.
In no specific order:
- Synthetix V3 will allow to create synthetic assets freely, moves to veSNX gauges & time locking, differentiated debt pool for suppling collateral to, and receiving fees from, specific asset pools without having to be exposed to every asset.
- Compound finance will launch (edit: already launched) Compound III with single borrowable asset and others as collateral.
- Nexus V2 will allow for syndicates (who manage underwriting capital) to be built on top of the mutual’s infrastructure. Creates Delegates staking — and cover policies will be NFTs.
- dYdX V4 will be developed as a standalone blockchain based on the Cosmos SDK and Tendermint Proof-of-stake consensus protocol.
- Sushi 2.0 (mostly already deployed) has become a hybrid exchange with a bunch of innovative money lego protocols and NFT market place Shōyu launching soon.
- Yearn V3 will launch around mid September with improved security, flexibility new tokenomics and strategies.
- Rocket Pool is quietly building at least 3 massive scaling solutions to grow staked ETH.
- GMX working on X4 Protocol Controlled Exchange, PvP AMM and supporting trading anything that has a Chainlink oracle.
5. Future is multichain
This one is so obvious, that even Compound has a multichain strategy for its Compound III.
Yet simply deploying on several chains is not much of a competitive advantage anymore. To improve multichain experience a few protocols go a few steps further towards integrating native assets without 3rd party bridges:
- Sushi recently launched SushiXSwap DEX based on Stargate.
- Ren is working in partnership with Catalog for a Metaversal exchange built on Ren Blockchain. The vision is to create the most secure cross-chain DEX with built-in liquidity mechanisms and CEX-like features for users to easily swap assets across the most popular blockchains.
- MakerDAO’s End Game features a Maker Teleport — L2 bridge system that enables fast withdrawals from Optimistic Rollups.
- Lido launching stETH on L2s
- Convex building support for boosted pools on side-chains / L2’s.
6. Increasing influence of Uniswap V3
Uniswap’s V3 introduced concentrated liquidity where liquidity can be allocated to a price interval, resulting in higher capital efficiency.
Although not the best for the user experience, the trend has been picking up.
Osmosis is working towards concentrated liquidity mechanism and KyberSwap recently launched KyberSwap Elastic with the same feature.
What’s more KyberSwap’s Elastic offers different fee tiers for LPs. An innovation that Uniswap’s V3 introduced first.
7. Expanding token use cases
DeFi and the wider crypto community criticizes DeFi protocols for the lack of token use case.
Noted. A few improvements have been introduced to make tokens more attractive to hold:
- Chainlink announced Economics 2.0 with LINK staking.
- CAKE V2 tokenomics caps CAKE at 750M tokens, launched boosting farm yields, IFO benefits and weight voting.
- Maker, while other protocols are scaling down liquidity mining, will launch liquidity mining for MKR and even DAI holders. A lot of farming opportunities are coming for Maker soon, so make sure you read the full roadmap details here.
one more thing…
The transparency/clarity in which protocol teams are building is very different even among the top DeFi projects.
Some projects have very clear roadmaps and details on implementation (with YFI, SNX and MKR being the most open) and some projects do not disclose their roadmap at all or communication is poor (UNI being the most closed off).
DeFi is here to stay
Despite the market crash and the bear market, DeFi teams are working major improvements that hopefully will make DeFi tokens more attractive to hold.
I will be following the progress of these roadmaps so make sure to follow me on Medium and Twitter.
Follow for insight on DeFi and what’s happening in the crypto world.
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