Yield Farming Explosion Causes Parts of DeFi to Crack

Also, Aave enables undercollateralized loans, bZx's token distribution, VentureDAO's second investment.

Hello Defiers! Here’s what’s going on in decentralized finance,

  • Aave unveils feature enabling under-collateralized loans

  • Yield farming’s unintended consequences ripple through DeFi

  • bZx announces token distribution date

  • VentureDAO makes second investment

  • Arweave’s $100k incubator

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Unintended Consequences of Yield Farming

By Sebastian Aldasoro

The yield farming explosion is breaking parts of DeFi.

Yield farming, or token incentives DeFi platforms offer in exchange for users’ deposits, is driving huge growth in the space. Total value locked climbed to a record $2B yesterday, while tokens such as $LEND, $SNX, have more than doubled their value since the trend started three weeks ago.

But what started out as a way to drive users to DeFi platforms, has quickly turned into a race that’s focused on snapping up tokens. This has brought some unintended consequences: DAI demand causing it to come off its peg, Compound users borrowing their own supply, and artificial demand for assets like $BAT. 

DAI Peg Under Pressure

DAI, which is pegged at 1-to1 with the US dollar, is trading at $1.02 and has spiked to as high as $1.029 in DEXs such as Uniswap V.2 in the last few days, after a change in lending platform Compound Finance’s liquidity incentives drove demand for the stablecoin. Dai had traded at around $1.004 through most of June. 

Image source:https://messari.io/asset/dai

$COMP tokens were initially distributed proportionally to the interest accrued in a given market. Now Compound distributes $COMP proportionally across the markets that lend more dollars, which means lenders in DAI markets are set to get a bigger slice of COMP distributed monthly.

At $33.9M before the COMP incentive change, the DAI market was fourth in Compound after Tether, ETH and USDC. It has become the largest after the token incentive was introduced as users flocked to lend and borrow DAI after the update, as Dune Analytics data show.

Image source:https://explore.duneanalytics.com/queries/4626#9043

MakerDAO's community realized early on that Compound's upgrade could have an impact on DAI's peg and began debating what steps it could take to mitigate the risk. In case debt ceilings in the system get maxed out due to increasing demand for DAI, MakerDAO has recently increased the system's global debt ceiling from 225M DAI to 245M DAI: ETH-A's debt ceiling is up to 160M DAI and USDC-A’s debt ceiling is up to $60M.

MakerDAO began discussing the Peg Stabilization Modules on Friday. This module introduces an upgrade that would allow the system to trade DAI for USDC or USDC for DAI, at a 1:1 ratio.

Compound Users Borrow Their Supply

Users have been increasingly supplying and borrowing their own assets on Compound since the system's liquidity incentives were introduced. The strategy is as follows: users deposit DAI to Compound, borrow DAI, and re-deposit until they reach up to 4X leverage.

Users paying to borrow from themselves wouldn't usually make sense, but with $COMP trading at $191.55, rewards exceed the borrowing cost as users get COMP tokens for supplying and borrowing. Total supply and borrow in the Compound's DAI market is now at $1.4B, or 7.7x total Dai supply, and it keeps growing daily.

Image source: https://compound.finance/markets/DAI

Total value locked  in Compound has surged by 3.8x to $662M, overtaking MakerDAO as DeFi’s largest lending platform. It’s likely growth will continue as long as COMP rewards outweigh yield in other assets.  

$BAT gets 15 minutes of fame in DeFi

$BAT was the first token that saw an artificial demand from Compound users due to the initial liquidity incentives, which distributed $COMP proportionally to the interest accrued in a given market. It was only six days ago when BAT stood at $615M of combined supply and borrow and was the largest market in Compound by total volume. It’s now 7th out of 9 markets, at $23M.

Yield farming is driving capital to DeFi protocols at unprecedented speed. And, with all the new tokens and governance updates piling up on the line to go live, it could be argued that the frenzy won’t stop any time soon. Still, it’s not clear if this artificially driven demand will lead to long-term growth, or if the flock of farmers will leave once the yield in the DeFi crops isn’t as high.


Aave Brings Undercollateralized Loans to DeFi

By Cooper Turley

It looks like a key lego piece is joining DeFi: undercollateralized lending. 

Aave, the third-largest lending protocol behind Compound and Maker, will allow liquidity providers to delegate their borrowing power to other users, CEO Stani Kulechov tweeted this morning. 

“Credit Delegation allows Aave to scale DeFi TVL into financial debt markets world wide, making DeFi the liquidity backbone for finance. The overall DeFi narrative expands from deposit capital to DeFi to source capital from DeFi,” he wrote.

The announcement comes shortly after YEarn - a front-end aggregator of yield farming strategies - received one of the first undercollateralized loans from Aave based on social reputation.

In Aave’s credit delegation system, two parties enter a fixed agreement to determine interest rates, terms and covenants, enforced by OpenLaw’s blockchain-based contracts. The feature allows depositors to earn higher returns on their collateral while borrowers are able to access loans without requiring initial capital. 

Credit Delegation lays the foundation for more sophisticated credit scores and risk analysis, all of which will be built into the protocol in the coming year, Kulechov said. Lenders could start providing diverse liquidity sources for consumers and businesses, and different credit scoring systems and additional features for credit delegators can be built by the community.

The launch of Credit Delegation also marks the first of many major protocol upgrades set to go live in the coming weeks, including new governance frameworks and incentive mechanisms to aid in the protocol’s growth and sustainability.


bZx to Distribute its BZRX Token Next Week 

By Cooper Turley

DeFi lending protocol bZx is set to distribute its BZRX token on July 13th at 10am EST as a part of a wider re-launch. The first markets for the token are likely to be in DEXs like Uniswap, in line with the distribution of other governance tokens like COMP, BAL and UMA.

BZRX can be earned through rebates and Balancer liquidity incentives, including staking to a bZxDAO to collect trading fees in ETH and any supported ERC20 token.

Unlike other recent DeFi token listings, BZRX has been live for quite some time. Despite being non-transferable, certain centralized exchanges, like Bilaxy, have already created trading pairs to capture demand come launch.

User Compensation

Beyond the listing, bZx has also been making plans to compensate those affected by the protocol’s downtime in February following the flash loans attacks through a Lender Rescue Plan.

bZx will allocate just over 2M BZRX (or 0.2% of the total supply) vested over 4 years to those who were affected by the downtime. The protocol will use a snapshot to determine eligibility and simultaneously look to replenish the iETH liquidity pool with half of the fees earned from protocol usage.

If one thing is for sure, bZx is making plans to come back with vengeance and one to keep an eye on in the coming months.


For-Profit DAO Makes Second Investment

VentureDAO, a product of the MetaCartel group, announced its second investment is into Zapper, an interface that makes DeFi easy and simple to use.

VentureDAO is one of few decentralized autonomous organizations which are structured like a venture fund. The space had stayed mostly clear of for profit organizations since The DAO hack in 2016 but the structure is making a comeback.

VentureDAO’s first investment was in Dai challenger MetaCoin. The LAO, another for-profit DAO, last month announced its first investment will be in Tornado.Cash.

The birth of decentralized venture funds for blockchain startups could provide a boon for the space at a time when traditional VC funding dries up.


Arweave's Announces $100,000 Incubator

Data storage blockchain protocol Arweave las week announced its Open Web Incubator is live. It's a six-week-long online program in partnership with Gitcoin, and has a pool of $100,000 to be invested in profit-sharig tokens.


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About the founder: I’m Camila Russo, a financial journalist writing a book on Ethereum with Harper Collins. (Pre-order The Infinite Machine here). I was previously at Bloomberg News in New York, Madrid and Buenos Aires covering markets. I’ve extensively covered crypto and finance, and now I’m diving into DeFi, the intersection of the two.