Who are the pillars of liquidity and innovation in the on-chain crypto market?

Most people might say it’s DeFi. Indeed, as a cornerstone of on-chain liquidity markets, DeFi not only provides a low-friction trading environment and genuine native returns for existing funds but has also become a major channel for introducing incremental funds and high-quality underlying assets like RWA. It is an indispensable positive factor for the overall liquidity in the crypto market.

However, since 2023, as other concepts have been increasingly hyped, the overall narrative of DeFi has gradually diminished, especially during market downturns, where it often leads the decline. As a result, it has become less frequently mentioned and has been forgotten in the rotation of crypto world narratives.

Nevertheless, it is worth noting that, three years later, the DeFi narrative is showing some new changes worth paying attention to. Whether it’s the new moves from established giants like Aave and Compound or the developments in emerging DeFi ecosystems like Solana, some interesting variables are emerging.

The faltering DeFi narrative

Although the “DeFi Summer” of 2020 holds a significant place in the memories of crypto enthusiasts, a closer look at the timeline reveals that the prosperity of the DeFi market lasted only about a year and a half, as reflected by metrics like TVL.

According to DefiLlama data, in November 2021, the total value locked (TVL) in DeFi reached a historical high of approximately $180 billion. Since then, it has experienced fluctuations and declines, compounded by crises such as Terra/Luna, Three Arrows Capital, and FTX/Alameda in 2022. Liquidity has been steadily drained, and by October 2023, it had hit a significant low.

As of the time of writing, the total TVL in the DeFi sector has fallen to about $85 billion (as of August 13), which is only 47% of the historical high at the end of 2021. This significant drop is not only reflected in the numbers but also in the ecological development of DeFi projects and user confidence.

For instance, many once-prominent DeFi projects have had to scale back their operations or even shut down due to fund withdrawals and a lack of market confidence:

On September 20, 2023, DeFi yield aggregator Gro Protocol announced it would cease operations and dissolve Gro DAO.

On September 21, 2023, cross-chain DeFi aggregator Fuji Finance announced it would shut down its protocol and stop operations.

On December 15, 2023, DeFi protocol SafeMoon filed for bankruptcy under Chapter 7 of the U.S. Bankruptcy Code.

On January 30, 2024, fixed-rate lending protocol Yield Protocol advised users to close their positions on the protocol, with official support ending on January 31.

On July 20, 2024, decentralized derivatives trading platform Rollup.Finance announced it would stop operations, with infrastructure shutting down completely after September 21, 2024, and users having a month to close positions and withdraw funds.

These are just some of the more well-known DeFi protocols reported in the media. In reality, the pace of project shutdowns in the crypto industry accelerated significantly in the second half of 2023, leading to a “shutdown wave” in the sector. Many projects seemed to collapse overnight, unable to sustain normal operations.

For the DeFi protocols that are still operational, the performance of their tokens in the secondary market is also quite bleak. Interestingly, even compared to Bitcoin and Ethereum, which are often viewed as “Beta” assets, DeFi tokens—previously considered “Alpha”—are underperforming:

Taking November 2021 (BTC: $68,999) as a reference point, Bitcoin’s price is now about $60,000, roughly 86% of its peak at that time.

Ethereum’s price is approximately $2,670, about 55% of its peak (ETH: $4,800) during the same period.

However, the performance of DeFi is almost disastrous, with the DeFi contract index on Binance showing a current price of around 630, less than 20% of the November 2021 peak (3400).

While such comparisons may not be entirely rigorous, they indirectly highlight an undeniable fact: despite the overall market rebound and Bitcoin reaching new highs, the DeFi sector has failed to keep pace with the market and attract new funds. Investor enthusiasm for DeFi has clearly waned, with much less interest in participating in and investing in DeFi projects compared to the past.

This situation serves as a warning for the future development of the DeFi sector.

OG DeFi’s self-rescue and expansion

However, observing the DeFi sector internally, some interesting variables are emerging recently, with notable movements from leading blue-chip projects like Aave and Compound.

1) MakerDAO: RWA and Stablecoins in Sync

MakerDAO (MKR) is one of the most resilient among the established DeFi projects. Maker and MakerDAO have been continuously evolving, with “Maker Endgame” being one of the boldest initiatives by DeFi protocols, especially in the RWA (Real-World Asset) sector.

As of August 2024, according to Makerburn data, MakerDAO’s RWA investment portfolio has reached approximately $2.1 billion.

Source: Makerburn.com

Meanwhile, the total supply of DAI has risen above $5 billion since November last year. In addition, in May, MakerDAO announced plans to launch new tokens to replace DAI and MKR: a stablecoin and a governance token.

The new stablecoin, NewStable (NST), will be an upgraded version of DAI, continuing to peg to the USD and using RWA as reserve assets. Dai holders can choose to upgrade to NST.

PureDai aims to create an idealized version of DAI, using highly decentralized oracles and only accepting highly decentralized and thoroughly vetted collateral (such as ETH and STETH). Additionally, PureDai will launch a lending platform to maximize its supply.

2) Aave: Updating Security Modules and Token Buyback

On July 25, Aave’s governance representative, ACI, proposed a new economic model for Aave, suggesting a “buy and distribute” plan. This would involve purchasing AAVE assets from the secondary market using protocol revenue and bolstering the ecosystem reserve to reward key users.

The proposal also includes activating a new security module for Atokens, removing the GHO lending rate discount, and introducing an Anti-GHO generation and burn mechanism to enhance the alignment of interests between AAVE stakers and GHO borrowers. Additionally, it recommends upgrading the current AAVE security module to a new “staking module.”

This update addresses past issues with Aave’s security module, such as inefficiencies in bad debt handling, exemplified by the 2.7 million CRV bad debt from the previous CRV hunting incident, which led to temporary AAVE Token issuance for auction to cover debt gaps. The new security module will block such issuance from the supply side and create long-term demand for AAVE by using protocol revenue to purchase AAVE assets and allocate them to the ecosystem reserve, thereby improving AAVE’s appreciation potential from both supply and demand perspectives.

3) Compound: Whales Seize Control, Mixed Blessings

On July 29, Compound experienced a heated voting battle, ultimately passing Proposal 289 with a narrow margin of 682,191 votes to 633,636 votes. This proposal allocated 5% of Compound’s protocol reserve (approximately $24 million worth of 499,000 COMP Tokens) to the “Golden Boys” yield protocol for generating returns over the next year.

At first glance, this seems like a positive decision, adding a new income attribute to the COMP governance token. However, deeper investigation reveals concerns: the main player behind “Golden Boys” is Humpy, a whale known for previously taking control of Balancer through governance attacks.

Humpy’s acquisition of a large number of tokens and use of voting power to move $24 million from Compound’s treasury to his controlled goldCOMP treasury may appear legitimate in process, but it undeniably harms decentralized governance.

Additionally, Compound has proposed the concept of “Proposal Guardians” to prevent malicious voting through a multi-signature mechanism. Initially, guardians will be composed of a 4/8 multi-signature from Compound DAO community members, who can veto proposals that have passed majority votes but are still pending execution when governance risks arise.

In contrast, Uniswap and Curve have been relatively slow to act. Curve recently faced a large-scale token liquidation crisis involving its founder, and the long-standing $140 million CRV “dam” was finally triggered during this crisis, causing significant market turbulence and unease.

Conclusion

In fact, the prosperity of most DeFi projects in 2020 and the challenges they began facing in 2021 were somewhat predestined—generous liquidity incentives are unsustainable. This is why the new product directions or token empowerment attempts by current DeFi blue chips are reflections of their self-redemption efforts through various channels.

Notably, despite recent market turbulence leading to large-scale liquidations—such as Ethereum DeFi protocols setting a record for liquidations on August 5, 2023, with over $350 million liquidated—there hasn’t been a panic-driven cascade. This indicates that DeFi’s resilience is improving, with a trend of adjustment and exploration.

As the cornerstone of liquidity and innovation in the crypto market, DeFi projects that survive the bubble purge and continue to innovate are likely to stand out. They have the potential to re-attract funds and users, creating new narratives and making their mark in the evolving landscape.

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