Avalanche’s Counter-Cyclical Resilience: Pioneering DeFi Beyond Ecosystem Boundaries
Credit Image: Ava Labs
Guest Author: 0xSimon
Twitter: @cheng_shutong
Table of Contents:
1. Avalanche’s Sustained Competitive Edges — Exploring DeFi, RWA, and Web3 Gaming
2. GMX Protocol
2.1. Defying the Bear Market: When V1 Hits its Limit 2.2. The V2 Upgrade: Addressing Shortcomings and Amplifying Benefits for Both LPs and Traders
3. Trader Joe
3.1. V2’s Groundbreaking Enhancement: The Efficient Liquidity Book (LB)
3.2. The Many Facets of the LB Mechanism: Set to Spearhead Avalanche DeFi’s Resurgence
4. Diving into Struct Finance
4.1. Struct Finance: Bridging the DeFi Void with Structured Finance
4.2. Peeling Back the Layers: Decoding Struct Finance’s Revenue Streams and Origins
4.3. Collaborative Endeavors with Public Blockchains and Protocols — Championing Liquidity Provision
4.4. Market-Endorsed Offerings: Balancing Stability with Optimal Returns
Credit Image: Ava Labs
1. Avalanche’s Competitive Edge Remains Strong — DeFi, RWA, Web3 Games
Avalanche boasts attributes such as high performance, low costs, security, interoperability, and scalability. The high adaptability of its subnets empowers any project to construct an optimized, project-specific blockchain public network, which can seamlessly collaborate with the Avalanche ecosystem without vying for resources within the same environment.
From a data perspective, metrics like TVL, active user count, new address generation, and validator numbers in the AVAX ecosystem have been on a decline. However, this downturn is a general trend in the crypto sphere during bear markets, and the future trajectory and strengths of AVAX have not been debunked. Numerous analysts are contemplating the potential catalyst for the upcoming bull market, focusing on either the financial or user front. Yet, in a saturated market, merely depending on Web3’s insularity can’t amplify value. Building bridges from Web2 to Web3 and ushering in fresh markets can overcome the stalemate of a zero-sum game. Setting aside ETFs, our anticipation leans towards Web3 gaming, RWAs, and sovereign debt markets, which are poised to give birth to novel asset configurations and market-making strategies, marking another surge for DeFi.
Comparatively, Avalanche’s evolution seems brighter than other public blockchains. It retains a competitive advantage against layer2 solutions, ensuring resilience in forthcoming cycles. As per official sources, Avalanche emphasizes Web3 gaming, RWA, and DeFi as pivotal avenues for strategic growth. RWAs and DeFi solidify capital inflow, while Web3 gaming bridges the gap between Web2 and Web3 audiences, establishing robust network synergy.
In terms of Web3 gaming, relying solely on the Game-Fi notion is obsolete. The focus should shift towards catering to Web2 users, collaborating with popular Web2 game brands, embedding minimalistic Web3 components, and emulating Polygon’s past successes bolstered by an array of NFT brands. Nonetheless, placing excessive emphasis on brands and users at the expense of Web3 assets could potentially undermine the intrinsic value of games. Transitioning games from Web2 to Web3 demands a novel value conduit — the game-centric blockchain. Avalanche’s subnets are tailor-made for this, providing top-notch customization and performance, fortified by the safety net of Avalanche mainnet’s colossal staked AVAX. This guarantees secure game operations and safeguards brand reputation during the Web3 transition.
Several notable entities like Fat Penguin NFT, renowned Web2 game brands Trial Xtreme and Walker World in association with Merit Circle DAO are gearing up to unveil game blockchains on AVAX. Additionally, Web3 games such as Gmt and Xana are architecting subnets on AVAX. On the RWA front, Avalanche Vista, a $500,000 RWA fund, intends to bolster assets like real estate and commodities. If one believes in the symbiotic growth of blockchain through Web3 games and RWA, DeFi on AVAX is poised for a breakout in the next cycle. These sectors promise innovative asset types, issuance mechanisms, and trading modalities for DeFi, propelling the evolution of the DeFi framework. While Ethereum currently reigns supreme in the DeFi realm, it only mirrors past accomplishments, not future potentialities. The impending DeFi cycle promises a plethora of game assets, RWA entities, item assets, and new-age standardized tokens. The avant-garde attributes of the foundational public chain will serve as the bedrock for these innovations, with a significant portion being issued on Avalanche.
In the recent half-year, AVAX’s strides in the DeFi domain are evident, with pivotal protocols undergoing essential modifications. Subsequent segments will delve deeper into AVAX’s premier DeFi protocols and potential game-changers.
2. GMX Protocol
Credit Image: GMX
2.1 Growth Against the Bear Market: V1 Hits a Bottleneck
Since FTX’s collapse, a rising number of traders have shifted to on-chain perpetual DEX, leading to continuous expansion in its market size. GMX stands out as one of the rare protocols to register growth amidst the bear market, delivering genuine profits that get distributed to its token holders. The GLP model, combined with a narrative centered on real profits, has elevated GMXto the upper echelons of premier projects, as evidenced by multiple metrics reaching new heights. Currently, the platform boasts a total trading volume exceeding $140 billion, with assets under management surpassing $500 million. It has over 200,000 unique addresses and has distributed more than $220 million in fees to its users.
However, after GMX’s price surge in May, there was a noticeable slowdown. Its TVL (Total Value Locked) and other associated metrics hit a plateau before showing signs of a decline. Beyond market dynamics, several inherent limitations of V1 are to blame:
a) Centralized oracle price feeds have shown vulnerabilities. For example, there were episodes on the Avalanche network where the oracle prices were manipulated, mainly due to AVAX’s insufficient depth, leading to losses for GLP.
b) From a risk standpoint for LPs (Liquidity Providers), V1 came with its share of challenges. While it incorporated borrowing and settlement fees, it lacked a bilateral funding rate. This absence meant a conspicuous void in arbitrage opportunities, leading to imbalances in unsettled contracts that potentially put LPs at a higher risk.
c) Traders had to contend with steep fees. V1 imposed a 0.1% fee for both opening and closing positions. Additionally, the absence of a tiered fee structure for limit orders meant a pronounced friction when compared to traditional centralized exchanges (CEX).
d) Asset diversity was another area where V1 lagged. It supported a mere six trading pairs. For perspective, DYDX supports 30 contract trading pairs, Synthetix offers 60, and other platforms like Gains and HMX have diversified into areas like forex and stock trading.
Credit Image: GMX
2.2 V2 Upgrade Filling the Gaps, Benefiting Both LPs and Traders
GMX V2 was launched on Avalanche and Arbitrum in August, aiming to further enhance the protocol’s security, efficiency, and to optimize the trading experience for users while minimizing potential risks for GLP (Gains LP) users.
For users, traders are primarily focused on the protocol’s trading experience and costs. GMX V2 introduced the following optimizations:
a) Expanded Asset Classes: On Arbitrum, new assets such as SOL, XRP, LTC, DOGE, and ARB have been supported, while on Avalanche, assets like SOL, XRP, LTC, and DOGE have been added. V2 plans to incorporate more trading categories in the future. Additionally, V2 supports coin-based contracts, allowing traders to directly use the associated trading assets as collateral, eliminating the need to convert them into USD.
b) Adjusted Fee Model: The opening and closing fees have been reduced from the previous 0.1% to either 0.05% or 0.07%. A new funding rate model has been introduced, enlarging arbitrage opportunities and enticing arbitrage capital to maintain a balance between long and short positions. Overall, this change can optimize trading costs for traders by approximately 30–50%, and the introduction of these funding rates ensures smoother fee payments.
c) Introduction of New Oracle Markets: By utilizing Chainlink’s low-latency oracles, GMX can acquire improved real-time market data. Collaboration with Chainlink ensures timely and efficient oracle services, fostering faster transaction speeds and reduced slippage, while also diminishing the likelihood of price manipulation attacks.
For Liquidity Providers (LPs), the primary concerns revolve around incentive models, levels, and risk management. GMX V2 brought forward the following enhancements:
a) Isolated Liquidity Pools: Each trading asset pool operates independently from the others, characterized by distinct fund sizes, funding rates, and utilization rates. For LPs, this segregation reduces risk and permits targeted selection of assets, facilitating better return cycles and anticipated profits. For users, these independent liquidity pools pave the way for the introduction of a wider array of trading assets in the future.
b) Balanced Long/Short Incentives: V2 has integrated incentives for both long and short open contracts, establishing a balance that aids in automatically hedging the profits of LPs and traders.
c) Incorporation of Synthetic Asset Trading: In subsequent upgrades, GMX aims to extend beyond cryptocurrency trading by introducing markets for commodities, stocks, and other financial instruments. The plan is to list synthetic assets and gradually phase out the use of GLP tokens.
In a broader perspective, GMX V2 significantly rectifies many limitations present in the V1 version, refining the trading experience and cost structure for users. The addition of diverse asset categories, coin-based contracts, a restructured fee model, and the integration of Chainlink oracle markets stand out. For LPs, the V2 update has introduced isolated liquidity pools and balanced incentives between long and short positions, which diminish risks and bolster profits. This upgrade also heralds a pivotal opportunity for Avalanche. Although a major chunk of asset pools remain concentrated within the Avalanche layer, the L2 layer, represented by Arbitrum, hasn’t seen a surge in locked-in values due to asset composition or enhanced security. GMX, epitomizing the decentralized perpetual track, underscores efficiency and cost over asset security. While GMX has solidified its position in the Avalanche ecosystem, it also brings forth a myriad of application scenarios for AVAX, further highlighting AVAX’s prowess in the DeFi space.
Despite V2’s rocky performance during its initial stages, characterized by fragmented liquidity in the newly introduced isolated pools, there’s anticipation for more incentive schemes co-launched by the project’s team and AVAX. The Odyssey event in late September saw a surge in V2’s user base, with a single-day addition of over 8,000 users. As the Total Value Locked (TVL) and user base continue to expand, GMXis poised for robust capital accumulation, setting the stage for sustained growth.
3. Trader Joe
Credit Image: Trader Joe
3.1 V2 Upgrade Unveils Capital Efficiency Marvel — Liquidity Book (LB)
Trader Joe is a DeFi project offering a suite of services, with its mainstay being a DEX. It has incorporated numerous innovative strategies in its product design, most notably in its V2 product, the Liquidity Book (LB). This might be the most advanced DEX liquidity provision model we’ve encountered.
While Uniswap V3’s concentrated liquidity enables LPs to choose fee tiers matching their risk profiles and potential gains, greatly extending the scope for DEX liquidity providers and heightening capital use efficiency, there’s an elevated chance for actual trade prices to drift away from this range. As a result, liquidity providers may not secure any portion of trading fees. In some cases, “active LPs” who modify liquidity ranges as per market trends can’t surpass the earnings of “passive LPs” who merely set and forget.
Trader Joe’s LB is a groundbreaking trading system, blending the principles of an “order book” with a “liquidity pool.” It’s influenced by Uniswap V3’s concentrated liquidity but offers its own unique twist. While Uniswap permits liquidity providers (LPs) to pick custom price brackets, Trader Joe employs distinct “price buckets” allowing LPs to set fixed price ranges for targeted liquidity placement. Within the LB system, a “Bin” denotes a specific price range, with each Bin illustrating a segment rich in liquidity. All the Bins across liquidity pools share the same fixed width, which is pivotal to this trading model’s unique attributes. Key benefits include:
credit image: Trader Joe
3.2 LB Mechanism Offers Multiple Advantages, Aiming to Lead Avalanche DeFi’s Second Spring
First and foremost, the liquidity within each Bin remains constant until fully utilized, which can draw in a larger trading volume. Furthermore, this system ushers in fluctuating fees, allocating resources based on liquidity and market requirements. Essentially, as token price volatility soars, so does the transaction fee rate, compensating liquidity providers for potential revenue losses through augmented transaction fee earnings.
While Uniswap V3 superficially seems more aligned with user and trader expectations, the underlying requirement for traders hinges on abundant liquidity, translating to reduced slippage and a seamless trading interface. From a liquidity efficiency standpoint, Joe V3 is more poised to captivate liquidity providers. While boosting capital efficiency, it also augments revenue prospects. The Joe V2 framework has already marked its success on Arbitrum, underscoring the efficacy of the Liquidity Book approach. The TVL burgeoned by nearly 10x in the preceding six months, clinching the title of the second-largest DEX by transaction volume post the March ARB airdrop. For a time, it monopolized 45% of L2’s trading volume. Albeit growth momentum has ebbed recently — a typical trajectory for several DeFi protocols in a bearish phase — the impending evolution of the Avalanche DeFi ecosystem might invigorate it once again. The Liquidity Book stands out as the market’s most efficient AMM mechanism, even promising zero-slippage trades. On the Avalanche network, Trader Joe, having set its foundation early, blossomed swiftly. Whether you consider Total Value Locked (TVL) or trade volumes, it’s evident that they seized the initial mover advantage, currently reigning as the top DEX in terms of assets secured on this chain.
While Joe V2 enhances LPs’ capital utilization, curtails transient losses, and fetches greater returns, it inadvertently elevates the entry threshold for users. This means liquidity providers must tweak their market-making ranges in line with real-time asset valuations. Trader Joe V2.1’s Auto Pool, rolled out from June onwards, is crafted to diminish the complexities LPs face when market-making on V2. It modifies market-making ranges every 30 seconds, in sync with volatility oscillations. During low volatility phases, liquidity is concentrated in Bins adjacent to the active zone. As volatility amplifies, the liquidity allocation span broadens, attenuating risks for LPs and ensuring more stable returns. As of now, it caters to trading pairs like AVAX-USDC and ETH-USDC, but there’s an agenda to augment this list. Struct plans to incorporate Trader Joe Auto Pools, signifying that the revenue streams and output of Struct Vaults will diverge from the established GMX Vaults.
4. Struct Finance
4.1 Struct Finance Fills the Gap in the DeFi Space with Structured Financial Products
In traditional finance, structured financial products refer to a novel financial instrument that combines fixed-income products with financial derivatives. For example, it might use U.S. government bonds as a foundational investment to guarantee stable returns while incorporating a basket of options, indices, commodities, and other assets as a combination to enhance returns. From an investor’s perspective, the primary purpose of such financial instruments is to create differentiated investment portfolio strategies based on the investor’s risk preferences. This approach ensures a steady base of returns for investors while also offering the potential for higher investment returns.
In the realm of cryptocurrency DeFi and related token economics, there are products with varying return expectations, levels of risk, and return timeframes. These include providing LP (Liquidity Provider) earnings for AMM (Automated Market Maker) services, collateralized lending, POS (Proof-of-Stake) staking rewards, and more. However, these are all variable income sources. Large institutions and conservative investors often require fixed income to generate returns from idle assets.
Struct Finance accomplishes this by dividing income into two parts: fixed income and variable income. The earnings from underlying assets initially satisfy the fixed income portion, with any remaining earnings being part of the variable layer. These correspond to relatively low-risk and stable returns for the fixed income part and relatively higher-risk and high-potential-return options for the variable part. This approach provides users with tailored income choices.
4.2 Unveiling the Mysterious Layers of Income and Their Sources in Struct Finance
Struct initially introduced interest rate products, where users can subscribe during a subscription period and deposit the underlying assets or income-bearing tokens (such as BTC.b, wETH, USDC, etc.) of a certain income strategy (e.g., becoming GMX’s GLP) into both fixed and variable layers. At the end of the subscription period, the income generated from these underlying assets or income-bearing tokens first goes into the fixed layer to meet the predetermined fixed interest rate for investment returns. Any excess income is then allocated to the variable layer.
During the subscription period, the protocol provides initial conditions for the fixed layer, such as fixed interest rates and holding periods. If the actual income from the income strategy exceeds the fixed interest rate, the fixed layer can be self-sustaining in terms of its required base income, without needing subsidies from the variable layer. Any surplus income flows into the variable layer, effectively adding leverage to the variable layer. Assuming the TVL (Total Value Locked) ratio between the fixed layer and the variable layer is represented as X, the fixed layer’s income remains at the fixed interest rate, while the variable layer’s income rate is calculated as Fixed Interest Rate + (X+1) * (Actual Interest Rate — Fixed Interest Rate). However, in situations where actual income exceeds fixed income, the dynamics can be more complex. Additionally, if the underlying assets experience losses, it can amplify losses in the variable layer. For more details, you can refer to the document at Struct-Finance.docsend.com.
In essence, given the initial conditions, the funds deposited into the variable and fixed layers represent a kind of strategic game. The ratio between the TVL of the fixed layer and the TVL of the variable layer is the crucial factor in determining how much of the floating income share can flow into the variable layer. This decision-making process challenges the project team to determine the initial fixed interest rate, investment period, and other conditions for income products.
4.3 Partnerships between Public Chains and Protocols — Liquidity Providers
Compared to traditional lending methods that aim to increase yields, the Struct mechanism is more secure, devoid of liquidation risks, and offers higher returns at the variable layer. Additionally, under the premise of initial fixed returns, it doesn’t lead to significant losses for the fixed layer but instead, it offers a consistent and stable income. In the near future, Struct will permit users to create interest rate products without any permissions, customizing elements such as the yield platform, duration, fixed interest rates, among other factors. This enables the establishment of more diversified interest rate products, meeting the yield and risk requirements of varied investors. Viewing it from this angle, Struct promotes the public chain it resides on and its associated protocols, drawing in more funds and users, and fostering the collective flourishing of its ecosystem.
Contrary to other DeFi protocols which grapple for liquidity internally, Struct stands as the entry point for liquidity in the platform’s ecosystem. DeFi is the foundational stone for the prosperity of the public chain, while liquidity providers (LPs) act as the stabilizers and engines for DeFi products. Yet, post the DeFi disillusionment in 2021, LPs have become more judicious, especially with concerns around impermanent losses and price fluctuations. Presently, LPs prioritize a balance between returns and risk margins. Thus, enticing more LPs to join the public chain and its underlying DeFi protocols is pivotal for future progression.
Borrowing from economic theories, several protocols have embraced the idea of price discrimination to maximize consumer surplus. For instance, Trader Joe and Uni V3 have championed concentrated liquidity and its order book mechanism. This lets liquidity providers allocate their capital within designated price boundaries, enhancing the utilization efficiency of assets. Consequently, LPs can freely offer liquidity across multiple price brackets. This strategic move has lured more market-making funds and increased the Total Value Locked (TVL). Concentrated liquidity is essentially a multi-tiered price discrimination, designed to cater to LPs with varying risk appetites. Likewise, Struct’s approach of layered income and its internal leverage mechanics provide multi-tiered price discrimination based on risks and rewards, aiming to fulfill the investment criteria of different LPs and drawing more capital into the fold.
Markets Page
BTC.b-BTC.b APRs
4.4 Market-Tested Products: Stable & High Returns Combined
As of now, Struct Finance collaborates with products built atop GMX V2 and Trader Joe V2. By integrating its layered income methodology with these protocols, Struct Finance offers an expanded selection for users who provide liquidity to DeFi protocols like GMX and Trader Joe. It segments income into investment assets with different risk profiles, catering to the varying risk appetites of LPs. As a result, compared to the past, these DeFi protocols witness a broader spectrum of liquidity providers. Struct is poised to act as a conduit and gateway for liquidity, linking public chains and DeFi protocols. As it widens its application horizon, it aims to infuse the AVAX public chain and its ecosystem with multifaceted liquidity.
Currently, the Struct Finance protocol has been operational for just three months and boasts four Vault types: USDC-USDC, BTC.b-USDC, BTC.b-BTC.b, and BTC.b-wETH, with its peak TVL reaching 2.2 million USD. Evaluating the historical returns across these four protocols, the fixed income segment consistently hovers around an annualized 8–10%. Meanwhile, the variable income section has showcased impressive figures, with BTC.b surpassing 20%, wETH eclipsing 100%, and USDC outdoing 200%. The efficacy of its mechanism has been vindicated in the marketplace, distinctly demarcating the dual-layer income. Moving forward, the protocol aims to roll out an array of Vault types to cater to users’ eclectic income sources and diversified return needs. Liquidity pools, forex, RWAs, LSDs, LSDfi, LRTs, among other revenue-centric assets, are on the drawing board. With the maturation of cross-chain, abstract account, and Intents concepts, the crucial milestone of multi-chain interactivity is on the horizon. Struct Finance envisages expanding across a multitude of chains, consolidating more liquidity and driving up the TVL. By fusing its unique layered income, fixed returns, and derivative strategies, it seeks to unearth an array of income avenues for liquidity providers and end-users.
About Avalanche
Avalanche is a high throughput smart contract blockchain platform. Validators secure the network through a proof-of-stake consensus protocol. It is said to be fast, low cost, and environmentally friendly. Mainnet was launched on September 21, 2020. Since then, the platform has grown to secure over 100+ individual projects, 950+ individual block-producing validators, and over 500k+ community members around the globe. Decentralized finance (DeFi) applications can be found on Avalanche such as TraderJoe and Benqi.
Website: https://www.avax.network/
Twitter: https://twitter.com/avax
Reddit: https://www.reddit.com/r/Avax/
About GMX
GMX is a decentralized spot and perpetual exchange that supports low swap fees and low price impact trades. Trading is supported by unique multi-asset pools that earns liquidity providers fees from market making, swap fees and leverage trading. Dynamic pricing is supported by Chainlink Oracles and an aggregate of prices from leading volume exchanges.
Website: https://gmx.io/
Telegram: https://t.me/GMX_IO
Discord: https://discord.com/invite/H5PeQru3Aa
About Trader Joe
Trader Joe is a leading multi-chain decentralized exchange and the inventor of Liquidity Book, the most capital efficient AMM in DeFi. Trade your favorite tokens, access one-click yield farming and shop for the latest digital collectibles at the Joepegs NFT Marketplace. DeFi has never been easier thanks to Trader Joe.
Website: https://traderjoexyz.com/
Twitter: https://twitter.com/traderjoe_xyz
Discord: https://discord.com/invite/traderjoe
About Struct Finance
Struct Finance is redefining the DeFi landscape by introducing the tranching mechanism, traditionally rooted in the world of conventional finance. By segmenting yield-bearing products into distinct tranches, Struct offers both seasoned investors and newcomers a platform that caters to their risk appetite, democratizing access to high-yield opportunities. Founded by a team with deep traditional finance expertise, Struct is on a mission to bridge the gap between traditional and decentralized finance, crafting innovative solutions that prioritize transparency, accessibility, and user empowerment.
Website: https://www.struct.fi/
Documentation: https://docs.struct.fi/
Twitter: https://twitter.com/structfinance; https://twitter.com/structfinanceCN
Medium: https://medium.com/struct-finance
Discord: https://discord.com/invite/struct-official
