DeFi Developments Series — Compound, Balancer, & Curve

VYSYN VENTURES WEEKLY INSIGHTS #8

This post was originally published on the VYSYN VENTURES website.

In last week’s release, we provided an overview of “yield farming” and liquidity mining”. These trending activities have garnered the lion’s share of recent attention in the crypto world.

The release described yield farming and liquidity mining while detailing the unique risks and rewards associated with these activities. This week’s release will focus on the rapid developments in some of the biggest DeFi protocols over the past few weeks.

In recent weeks, the value locked in DeFi exploded and certain protocols have risen to dominant positions. But bugs and nuances in code have also been exploited which has led some to question how secure these platforms are.

For an overview of the risks and rewards associated with yield farming and liquidity mining, read last week’s release here.

DeFi Growth & Token Price Appreciation

(Source: defipulse.com)

The amount of value locked in DeFi began to rapidly increase in mid-June. Total value locked (TVL) in DeFi protocols grew from ~$1 billion on June 14th to ~$1.85 billion on July 5th.

The fast growth in DeFi has been fuelled by a self-reinforcing cycle of greater awareness and token price appreciation. As more investors become aware of the DeFi space, more capital flows into the tokens of DeFi protocols which pushes prices higher and leads to even more publicity and awareness. The concept of liquidity mining — where liquidity providers receive governance tokens for the capital they lock — further spurred this cycle by attracting the attention of yield farmers seeking new ways to capture return for their locked liquidity.

DeFi analyst Andrew Kang suggests that there is far more money sitting on the sidelines. Kang notes that the capital which has recently been flowing into DeFi has come from those who are already somewhat familiar with DeFi. Sophisticated investors are only now starting to consider investing and capital from the wider retail market hasn’t even considered entering. For wider retail capital to enter, hype needs to be spread beyond the crypto community as was the case for the crypto market in 2017.

Whether DeFi is destined to have further growth and capital flowing in is debatable. For the remainder of the article, we detail the latest developments in some of the leading DeFi protocols to inform the readers’ awareness of the current state of DeFi. We cover the Compound, Balancer, and Curve Finance protocols.

King Compound

(Source: Uniswap.info)

Liquidity mining opportunities, COMP token appreciation, and a diverse selection of tokens to lock all played into Compound’s rise to the most valuable DeFi protocol. Compound overtook long-standing leader MakerDAO as the COMP token skyrocketed from less than $70 to over $320 in the space of a few days in June.

The value of the COMP token has since retraced to ~$184 but the TVL in the protocol is currently over $630 million. Over recent weeks, COMP has been listed on several exchanges including Coinbase, FTX, and OKEx. These listings open up new channels for fiat inflow into COMP while also allowing traders to transition from other crypto holdings into COMP.

Users of Compound are currently utilizing the features of the protocol to leverage their DAI exposure beyond the amount in existence. There is currently $112 million Dai issued on-chain but Compound users have generated $572 million.

This leveraging is possible by utilizing borrowed Dai as collateral to borrow more Dai. However, this has served to feed into the “DeFi being unstable” narrative that some analysts have touted.

Balancer’s $500k Bug

The leveraging of Dai on Compound was the result of nuance in the code that users could capitalize on. By accessing more Dai and using this capital as collateral, users could make claims to a greater amount of the COMP governance tokens which are distributed.

Users of another leading DeFi protocol spotted a bug that they could exploit. Balancer — the fourth biggest DeFi protocol by TVL — had $500k drained from two liquidity pools on the protocol.

A hacker identified a bug in the Statera (STA) token that was accessible in two Balancer liquidity pools. Balancer is a permissionless protocol which means tokens with bugs can be added at the contract level of the protocol. Statera had a deflationary nature whereby 1% of the amount of each transaction was destroyed.

A hacker borrowed -$100k in WETH and swapped these funds back and forth with STA tokens 24 times. As the STA supply deflated, its value rose in relation to other tokens and the hacker capitalized on this by swapping the STA tokens for other assets.

Curve Finance — Stablecoin Demand Spikes Due to Yield Farming

A final DeFi protocol worth noting is Curve Finance. Curve Finance is an automated market maker that allows users to swap between different types of stablecoins or similarly priced assets. For similarly priced assets, Curve supports three types of Bitcoin tokens that are issued on the Ethereum network.

Liquidity providers earn return to lock in their capital and users can easily swap between stablecoins or execute borrowing and lending activities. As Compound introduced liquidity mining for COMP tokens, demand for stablecoins exploded. The impact was evident on the Curve Finance protocol as trading volume increased from ~$2 million to $60 million.

(Source: duneanalytics.com)

While the euphoric demand has since subsided, trading volumes remain elevated compared to early June levels. This spike in demand for loans on Curve liquidity pools also increased the APY available to yield farmers using the protocol. At peak demand, the APY available in one liquidity pool exceeded 100%.

DeFi Demand High But More Mishaps Likely

As evident from the elevated demand on Curve, DeFi usage has grown significantly since early June. Analysts such as Andrew Kang anticipate further growth as more capital flows into these protocols.

However, this field in crypto is still in the nascent phase. Even the biggest protocols such as Compound and Balancer are subject to bugs and unstable activities taking place in their liquidity pools.

We will continue to monitor the developments in DeFi as it takes the centre stage of the crypto world. For daily curation of the most important crypto news, join the VYSYN VENTURES Telegram channel.

VYSYN VENTURES is a premiere venture capital firm focused exclusively on blockchain technology and the digital currency ecosystem. www.vysyn.io / hello@vysyn.io