After Regulatory Crackdowns of CEX,Decentralized Yield Platforms to be in the Center Stage
The People’s Bank of China issued the “Notice on Further Preventing and Disposing of the Risk of Hype in Virtual Currency Trading” on September 24, followed by this document, BTC dropped 4% and ETH dropped 6% in 1 hour. Later, CEX Huobi announced that it is not accepting registration of new accounts for Mainland China users, and existing accounts from users in that region will be gradually closed out. Binance also announced that it would stop providing certain functions to Singapore users, including fiat deposit services, spot trading of crypto and purchase of crypto through fiat channels. Centralized exchange tokens such as HT and MX price have dropped by up to 40% in 1 day led by Chinaban acts, moreover, the exchange rate of USDT/CNY dropped to as low as 5.9 under such a mood of panic.
Massive Influx of CEX users into DEX
However, the prices of platform tokens of the largest decentralized spot exchange Uniswap and decentralized derivatives exchange dydx skyrocketed while other tokens were slumping with BTC: DYDX jumped nearly 40% and UNI jumped more than 20%. The reason was obvious: users are transferring assets to DEXs in such uncertain fate as CEXs. With an upsurge of DEX user base and the on-chain transaction volume, the booming of the DeFi market became a consensus, and this also triggered the price surge of leading DeFi protocols.
The following figure shows capital flow from Sep 22nd to Sep 29th, and indicates that a large amount of funds escaped from CEXs to DEXs.
TVL Surging for DeFi Yield Platforms
With the exponential expansion of the DeFi ecosystem in recent years, the total TVL has reached $190 billion. Various types of decentralized yield aggregation platforms based on DEX liquidity mining and/or lending protocols are emerging. Such platforms implement investment strategies through algorithms, they stake users assets on different DeFi protocols that provide liquidity mining and automatically allocate positions to help users gain higher profits. Compared with simply using CEX as wallets, more users have realized that depositing assets to decentralized yield aggregation platforms to gain additional profits is a much better choice. Yield aggregation platforms can greatly promote capital efficiency, so the surge of TLV on such service providers is as expected under the current regulatory environment for CEXs.
DeFi Yield Platforms Landscape
The DeFi yield aggregators were born to meet the needs of users to automate investment strategies and save them the trouble of monitoring the market to seek the best yield channel. Today we’re gonna talk about some popular and innovative yield aggregators.
The earliest yield aggregator is Yearn Finance, which was launched in 2020. As a DeFi interest-bearing aggregator, Yearn Finance can monitor the market and find the assets with the best yield for users (not necessarily from one single protocol, it can also be combinations of a series of protocols). Since yields of underlying return in DeFi change all the time, the smart contracts are set to automatically update the investment portfolio.
The DEX dual-assets liquidity mining was pioneered by Sushiswap, dual-assets staking usually gives a higher profit rate compared to single-asset staking, so it has been quite popular among DeFi users ever since. However, there are always 2 tricky pain points in this model:
- Threshold for normal users: users firstly need to have a pair of equal-valued assets at the same time to participate, and they also need to operate to provide liquidity to start mining. In addition, the profit rate of dual-assets staking is very unstable, and users often need to switch between multiple currencies, which requires complicated operations such as swapping and re-staking.
- Impermanent Loss: With the most common X*Y=K algorithm of DEX AMM, no matter how the exchange rate of the pair changes, there are always impermanent losses for liquidity providers, especially when there is a unilateral trend. Under some circumstances the yield of mining cannot even cover the impermanent loss, leading to negative return eventually.
Targeted at those problems, yield farming strategies with single-asset staking model but to obtain dual-assets staking profit emerged: Alpha Homora uses lending to increase mining leverage; Coinwind tries to solve the impermanent loss problem by centralized approaches; and Beaver Finance, which is incubated by Asteria Finance Lab, utilize options to hedge impermanent loss.
Alpha Homora
Current TVL: $836 million
Alpha Finance Lab’s first product Alpha Homora introduced leveraged liquidity mining, allowing users to use borrowed assets to leverage principal for yield farming. This is a great example of the DeFi Lego concept as a combination of multiple sectors such as lending and mining. However, with the leverage, users are also exposed to market risks at the same time also the impermanent loss is enlarged. Thus, there are prerequisites for using Alpha Homora, users need to be able to predict the market for choosing which assets to stake and when, otherwise, they will be unlikely to gain passive positive income in case the market went against their positions.
CoinWind
Current TVL: $718 million
The core of CoinWind is to effectively reduce the impermanent loss in liquidity mining through a combination of strategies. But users need to deposit dual assets in different DEXs on different chains by themselves then stake the obtained LP tokens to CW. CW’s impermanent loss hedging strategy is opaque, so there is no guarantee for liquidity providers on worry free, and platform charges service fee which is probably the highest among similar yield farming platforms.
Beaver Finance
Beaver Finance is a Single-Asset Intelligent Yield Farming platform which is the first in DeFi to integrate Liquidity Mining with the Option-based cutting-edge hedging solution for Impermanent Loss.
Beaver’s Asset Allocation Engine dynamically pairs equal-valued tokens from LP pools by algorithms for supplying liquidity on major DEXs, which enables users to automatically gain the high yields of dual-token LP farming in single-token staking mode.
Beaver’s Impermanent Loss Hedging Engine supported by Asteria Finance Lab, protects LP assets of farming positions by constructing European Option Portfolios for hedging against IL. Asteria Finance Lab was founded by a team of financial professionals from Wall Street and blockchain technologists from Silicon Valley, building options infrastructure for the DeFi industry.
Comparison of Yield Farming platform
The significance of DeFi yield farming platform is reflected in four main aspects: 1, easing user’s operations; 2, increasing user’s revenue; 3, reducing user’s costs and gas fees; 4, promoting investment security. The mechanism of Beaver, Alpha and CoinWind are compared below as well as from the aspect of user’s experience.
Beaver vs Alpha vs CoinWind
- In terms of user’s operations: Beaver and Alpha are automated, while multiple steps of manual operations are required on CoinWind.
- In terms of reducing user’s costs: Beaver’s asset pairing algorithm guarantees no slippage, no trading friction, and no depreciation of assets; slippage and gas fee occurs on Alpha Homora due to the need of swapping half of the deposited token into another one for pairing, so there are implicit losses on users’ principal; CoinWind, on the other hand, needs users to supply liquidity of dual assets on DEXs and bear the risks on their cost.
- In terms of return rate and system security: Beaver hedges against impermanent losses through professional option portfolios，which protects the user profits; Alpha itself as a lending protocol increases the user’s theoretical mining principal, but at the same exposed with bigger market risk and impermanent loss proportionally; CoinWind claims to hedge against impermanent losses, but by what mechanism, whether is decentralized are not disclosed, so the level of uncertainty of the system is quite high.
In summary, Beaver Finance has the advantage of being fully automated + high yield & low risk + lossless + system stability compared to Alpha and CoinWind.
Recap
Compliance issues of CEXs would continuously draw users and large crypto capital into decentralized platforms. Protocols with stable passive incomes which require feasible financial models and technical safeguards would win the battle eventually.
