Exploring the New Trends of the Three Pillars of DeFi: DEX, Lending, and Stablecoins

New DeFi Trends: DEX, Lending, and Stablecoins

Written by: Lao Bai, ABCDE Investment Partner

Today we will discuss new trends in the three major aspects of DeFi: DEX, lending, and stablecoins.

Let’s start with DEX

Since the introduction of UniV3, there have been few major innovations in DEX. The Curve War can be considered one, and the DEX race has officially confirmed a duopoly over the past two years. DEXes that aimed to improve slippage and impermanent loss have basically disappeared in recent years.

Currently, there are four trends I see in DEXes:

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1. Frankenstein DEX Ve(3,3) – This is currently happening. Previously, AC created Solidly on FTM, attempting to merge Uniswap, Curve, and OHM. This resulted in Ve(3,3), but it’s not really popular. Opening a branch on ETH didn’t help, but the OP fork Velodrome became popular. I feel that this is related to the decline of Alt L1 and the rise of L2, and that the various rewards on OP have also played a role.

Ve(3,3) is now penetrating various chains. Recently it launched on Chronos, and there’s Thena on BSC, and there’s one on Polygon that I can’t remember the name of… Each project has made some adjustments on Solidly, similar to how Sushi copied Uni, but the funny thing is that Uni wasn’t popular, while Velodrome, the copycat, was very popular on OP and directly killed Uni.

2. Hybrid DEX – This is also a kind of Frankenstein, but more of a user experience Frankenstein.

One reason is that after FTX collapsed, people’s distrust of Cex increased, but they still like the smooth experience of Cex. So we have the combination of CEX experience + DEX self-custody. The front-end is basically similar to DYDX and Blur style, connect the wallet first, then deposit money, and then all fund operations are completely off-chain. Settlement occurs on-chain when withdrawing.

Second is the AMM+OrderBook hybrid – using the Orderbook of market makers + the traditional AMM of LPs. When users trade, the system automatically selects the best price from the two, and for long-tail assets (where the Orderbook may lack MM or depth), the AMM mechanism can be used to “guarantee” a minimum level.

We’ve talked to several projects like this, and one of the more representative ones is Vertex, which just launched on Arbitrum and combines the above two. They not only deal with spot trading, but also derivatives, and their team is quite reliable. We just think that the DEX race is too fierce right now, so we haven’t invested. Of course, in ABCDE, this is normal. We discuss 40-50 projects each month, and ultimately only invest in 1-2 of them, pursuing a “One Shot, One Kill” style.

3. UniV3-Fi – Several points, first is the expiration of the V3 License protection recently, which is equivalent to open sourcing it, and there will definitely be more V3 forks appearing on various chains, second is various Fi based on V3, such as Paraspace (this project was on the crest of a wave a few days ago) based on V3 NFT for lending and borrowing, Panoptic based on V3 for options, Gammaswap based on V3 for impermanent loss hedging, etc., and there will definitely be more gameplay based on the underlying V3 in the future.

4. Curve’s Tricrypto New Generation Upgrade – Curve previously had one foot in the mainstream coin field, but individual users still use it less because the gas fee is much higher than Uni. This time, the gas fee has been reduced to the same level as V3, and there should be more usage scenarios for individual users and aggregators. Coupled with the gain brought to Atomic Swap by the upgrade of SNX V3, Curve’s competition with Uni in the mainstream spot field should be a highlight in the near future.

Now let’s take a look at lending

On lending, I see the following three trends:

1. Full-chain – From the design of Compound V3 and AAVE V3, and the popularity of RDNT, it is undoubtedly a trend to have full-chain lending. However, according to Min Dao, full-chain lending is still in a “pseudo full-chain” stage, at best a “cross-chain lending.” True full-chain lending should be “allowing any chain to deposit, withdraw, borrow, and repay, multiple chains sharing liquidity, and multiple chains sharing an interest rate curve,” which no one can currently achieve.

2. Segregated pools – The concept of segregating collateral assets started to rise with Euler, and now it is basically a standard feature on large platforms such as AAVE and some new platforms, with the aim of preventing situations where a prophecy machine manipulates or an asset directly KO’s the entire protocol, although it loses some flexibility, it must not let one rat feces spoil the entire pot of porridge.

3. No prophecy machine, no liquidation lending – This is particularly suitable for long-tail asset lending, because the depth and liquidation mechanism of mainstream coins are currently very mature, but many long-tail assets, even if they have segregated pools, are not dared to be put on many lending platforms because the risks of prophecy machine manipulation and liquidation are high. If these two mechanisms can be avoided, the capital efficiency of long-tail assets can be further released. Currently, I have seen three different approaches.

There are three DeFi projects mentioned in this text:

• Timeswap, which uses the complex XYZ=K AMM model, but the design may be too complicated for most users to understand
• InfinityPools, which borrows the LP from V3 and uses it for automatic clearing, and
• Blur’s Blend protocol, which is a point-to-point NFT protocol designed for long-tail ERC20 lending with some modification.

Stablecoins

There is not much to say about stablecoins since the Luna crash last year essentially declared “algorithmic stability is dead.” Recently, Frax has solidified this claim by changing its collateralization rate to 100%.

Although there are still new collateralized stablecoins appearing on the market that use various technologies to ensure they remain anchored, other than pure algorithmic stability, people are not very concerned about the issue of stability. Frax, which is only partially algorithmic, has not had much trouble staying anchored, so the application scenario is the most important factor.

The following are some trends observed in stablecoins:

1. The Endgame Plan of MakerDAO, GHO of AAVE, crvUSD of CRV, sUSD of SNX V3, and the concept of BTC-based NUSD proposed by Arthur, which I detailed in a post two months ago.
2. Stablecoins based on RWA – Ondo is currently working on this and has created an OMMF stablecoin backed by MMFs (money market funds) and US Treasury bonds. It is something on the fringes of the community.
3. LSD’s development before and after the Shanghai upgrade is bustling, and I think there may be stablecoins based on LSDFI, such as a Liquity fork that changes the collateral to stETH or a basket of LSD versions of ETH, and then makes some changes to the interest rate or something. I don’t know if any projects have already done this, but I think there will definitely be some in the future.

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