MakerDAO reclaims its place at the center of the Ethereum DeFi universe

Week in Review | #31 | 2020

Ethereum’s birthday week has been full of excitement. ETH price crossed $310, MakerDAO’s TVL hit $1B, and highly anticipated project upgrades have been (finally) released. The week was full of optimism. Yet, as excitement continues to build, there are more voices urging caution. As DeFi continues to grow it is important to remember that the industry is prone to cycles and that the projects are very young. 

It would benefit the industry to learn from the past, so that the steps forward may be taken with more confidence.

The growth of Dai

MakerDAO has reclaimed its place at the center of the Ethereum DeFi universe. $1B is an impressive round number, but more than that, it is a reflection of the project’s efforts in turning its stable coin Dai into real currency. MakerDAO has shown consistent effort to try to integrate Dai both within the Ethereum DeFi stack and outside it, namely in the gaming sector.

Coinbase’s launch of Dai Rewards is another step for the stable coins towards broad market adoption. While the 2% APY may not sound impressive next to the yields available on some of the DeFi applications, this will allow Dai to make its way into the portfolios of true retail users.

MakerDAO and Dai are not without issues, and the problems with maintaining the peg have been widely covered. However, with stable coins gaining in importance, it is a positive sign for the industry that a decentralized one is able to step outside the confines of the DeFi sector.

Upgrades and launches

The biggest news is that Cardano’s Shelley has launched. This has been a highly anticipated release, as Cardano has been working on its PoS implementation for a (relatively) long time. The expected APY is under 5% and once again underscores the project’s long term view.

Our own Jon Jordan wrote about his views on what we can expect in terms of dapp development. It is easy to get excited about the prospects of a new scalable network, but as history has shown, it will take more than scalability metrics to take Ethereum’s dapp crown.

Augur Version 2 has also launched this week. Augur is one of the oldest dapps on Ethereum, and in many ways symbolized both the hopes and the shortcomings of the network’s dapp ecosystem. 

The initial version attracted attention as a predictions market and was noted to have a rather complicated UX. The new version aims to fulfill the grander oracle aspirations of the project. It is noteworthy that Augur is deeply integrated with the Ethereum DeFi stack. This connectivity with DeFi will likely become important for more and more dapp projects.

Ethereum DeFi

At the same time, DeFi ecosystems outside of Ethereum continue to evolve. FTX has announced that it will be building a DEX, Serum, on Solana. Solana is a young, high scalability blockchain, and it is a bit of a surprise that FTX, which is ranked in the top-25 spot exchanges on CoinMarketCap, would choose it for the DEX.

The various states of decentralized governance

One of the biggest controversies of this week was Balancer blacklisting YFII. The project is a fork of the recently launched liquidity product whose YFI token has shown staggering returns. YFII has been accused of being a scam, but whether or not that is true remains up for debate. 

What is troubling is that Balancer blacklisted the project without involving a community vote. Given the fanfare to which governance tokens are being distributed across the DeFi ecosystem, it is concerning that when a vote may seemingly be useful the decision is made without the token holders.

Still, decentralization marches on. Most notably Synthetix has replaced its Foundation with the: protocolDAO, grantsDAO and synthetixDAO. The concept is intriguing, but it remains to be seen how effective it will be and if there are any logical shortcomings with the structure. The early success of voting Compound gives confidence that this is a positive step for the project.

It appears that Aave is also serious about decentralized governance and will implement a token swap and utilize liquidity mining.

Ethereum DeFi

Assuming success, it would mean that of the top 10 DeFi projects on Ethereum, 5 would have implemented some form of decentralized governance.

High yield means high risk

Several industry leaders have come out with warnings about the amount of risk present in the DeFi space. On one side, Vitalik Buterin tried to highlight the technology risks present within the space. On the other side, Stani Kulechov shared his concerns regarding yield farming incentivizing risk.

As the amount of capital involved in the ecosystem continues to increase it is important to pay attention to these warnings. The DeFi ecosystem is being constructed in such a way that stack is highly interconnected. This increases the chance of chain reaction events.

Ethereum DeFi

At the moment that has been positive for the industry. Liquidity enters the ecosystem through one dapp and makes its way on to others. However, if something were to break in one of the more connected dapps, it could undermine the ecosystem as a whole.

The gaming sector continues to mature

While scalability roadblocks continue to hinder the growth of Ethereum’s gaming ecosystem, the sector as a whole continues to develop. As such, other networks are starting to find their niche. A good example of that is WAX, which is quietly building a reputation as a network for collectibles. 7 of the 44 marketplaces tracked by DappRadar are hosted on the blockchain.

Ethereum DeFi
WAX is bringing William Shatner NFTs to the Blockchain

Marketplaces are an interesting barometer for the gaming and collectibles sector, as the ability to buy and sell assets underpins a lot of the interest for its dapps. It is also interesting that some games are starting to look at how to incentivize productive behavior. For instance, Cryptovoxells is introducing Build Islands in order to get users to create things on their parcels.

An important aspect of the tokenized economy is economic incentives. When properly architected these can help the ecosystem flourish. It is a great sign that projects are starting to look beyond incentivizing activity, to incentivizing positive (less speculative) activity.

NB: The information provided here is for reference and informational purposes only. This is not investment advice and should not be treated as such.

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