By Chole
The traditional financial circle’s view on DeFi is inseparable from the idea that “the wanderer will eventually return home”. They believe that the fate of Crypto is inseparable from being incorporated into traditional finance, because as long as the bottleneck between the chain and the application landing cannot be solved, there will always be an end of being acquired and regulated.
If we classify stablecoins based on the isolation of centralized risks, they can be divided into centralized stablecoins and decentralized stablecoins. This is also one of the important attributes of stablecoins in an era where the threat of centralized supervision is approaching. Furthermore, after decentralization is solved, there is still the so-called "stability" concept of stablecoins. To truly move towards the end of stablecoins, we must create our own demand scenarios, not just general equivalent currencies, but even create unique economic activities to truly reflect the value of decentralized stablecoins.
The following article will explain in detail the features and latest developments of the four most promising decentralized tokens on the market today: MakerDAO Endgame Plan, AAVE GHO, CRV crvUSD and SNX V3 sUSD.
1. MakerDAO’s final plan USDC and RWA (real-world assets) bring potential risks to MakerDAO
Rune Christensen, founder of MakerDAO, specifically mentioned in 2021 that USDC (US dollar stablecoin) is one of the biggest potential risks of DAI stablecoin. DAI is fundamentally different from USDT/USDC. The former is decentralized and its main collateral is ether, while the latter USDT/USDC and other stablecoins have considerable friction with the current regulatory system, which is a considerable risk for DAI.
In addition to stablecoin risks, Maker has been increasing collateral related to real assets in the past few years, such as national bonds or corporate bonds, which makes Maker increasingly dependent on other real assets, cross-chain bridge assets, and assets that may be under pressure from regulators and law enforcement agencies. This has also caused users to criticize Maker for putting themselves in an untenable situation, because these assets fundamentally undermine Maker's goal of becoming a "censorship-resistant stablecoin."
Rune hopes that when he announces the “Clean Money” plan, Maker will be able to shift assets from USDC to other bonds, thereby increasing its yield and making it impossible for regulators or law enforcement to ban DAI.
Final plan launched
Rune proposed the "Endgame Plan" proposal in August last year. The main goal is to repair and improve MakerDAO and its governance and ecosystem, so that the whole can achieve a self-maintaining balance, which is the so-called "endgame state". (Provide the "Endgame Plan" proposal, readers who want to know more details can refer to this article) In short, Rune believes that if the whole reaches the "endgame state", DAI can become an "unbiased world currency", which is completely unaffected by external factors and becomes the infrastructure of both the crypto ecosystem and the world economy. In other words, Rune wants DAI to become the next Bitcoin.
According to the original proposal, several key parts were selected:
First of all, Rune will reorganize the existing decentralized work ecosystem and transform it into a self-operating decentralized autonomous organization "MetaDAO", which contains its complex things, and everything else is "Maker Core", which allows MKR token holders to conduct decentralized governance.
"Maker Core" will support collaboration with "MetaDAO", which will also have its own profit model, governance tokens and parallel governance processes. Rune explained that MetaDAO is like a fast and flexible application layer Layer2, while Maker Core is slow and expensive, but it is the cornerstone of security deployment Layer1. Therefore, MetaDAO is responsible for trying innovations and taking more risks, while L1 provides security for the above.
Next, now that Maker is heavily embedded in Ethereum and relies on Ethereum as collateral, Endgame should move to the next step, because Ethereum's dependence and Ethereum's dominance are fundamentally consistent with Maker Core, and Endgame needs to take full advantage of this symbiotic relationship and launch EtherDai (ETHD).
EtherDai (ETHD) can be seen as a new synthetic asset controlled by the Maker governance group and integrates top liquidity collateralized currencies, which can be imagined as stETH of Lido Finance. Rune said that the key to the long-term survival and success of DeFi protocols is to accumulate as much collateral as possible in pledged ETH. At the same time, Maker must also build pledged ETH products to maintain its position as a top DeFi protocol and decentralized stablecoin protocol.
In simple terms, EtherDai (ETHD) is a new asset generated through "staked ETH", which helps Maker obtain more "staked ETH". More mechanism details of ETHD in the future will also be completed through MetaDAO. Maker believes that this product may be as important as DAI in the long run.
Yield Farming Increases DAI Supply?
MetaDAO will also have a token called MDAO, with a total of 2 billion MDAO tokens, which will be distributed through staking mining. Staking mining is divided into three categories:
20%: DAI farm, designed to drive DAI demand and a broad token distribution effect.
40%: ETHD, also known as ETHD vault farming, which provides staking income in addition to MDAO farm income.
40%: MKR, delegated governance farm, entrusting voting rights to the preferred representative to receive rewards.
This 3-asset allocation ensures a broad and heterogeneous distribution of the MetaDAO governance token while aligning with Maker and MKR holders, maximizing the creation of a broader Maker ecosystem.
Simply put, distributing MetaDAO tokens MDAO through yield farming will help increase the supply of DAI collateralized by decentralized assets rather than the demand for DAI; more user activities will shift to ETHD farms. In the end game described by Rune, Maker will have more RWA as collateral, which means that the final collateral asset type will be on-chain + off-chain.
What is MetaDAO? What is its core operation?
As mentioned above, "Maker Core" will support collaboration with "MetaDAO", and "MetaDAO" will also have its own profit model, governance tokens and parallel governance processes.
Further explanation MetaDAO can be divided into three categories: Governors, Creators and Protectors.
Governors: Responsible for organizing Maker Core’s decentralized workforce and increasing governance participation
Creators: Responsible for the growth and innovation of the Maker ecosystem
Protectors: Responsible for the intermediary between Maker Core and the real world, configuring RWA assets, and protecting RWA from physical and regulatory threats
Finally, Rune also sets up three stages for Maker:
Pigeon Stance: Basically the state of Maker when the endgame plan was launched. In this phase, which is planned to last for two and a half years, Maker focuses on earning income and storing ETH for the next phase. After two and a half years, unless it is delayed or started early, it will enter the Eagle Stance phase.
Eagle Stance: Reduce seizureable assets to less than 25% of total assets. They intend to break DAI’s peg to the dollar at this time if necessary.
Finally, there is the Phoenix Stance, which is only activated during times of global instability or when collateral is likely to be attacked. This can happen at any time and without warning. During this phase, all remaining securitable assets are sold for more ETH. Finally, if the treasury is not sufficient to cover the debt and the protocol surplus is not enough, MKR will be sold on the market to keep the protocol solvent.
The above is the initial proposal and general structure of the “Endgame Plan” proposed in August last year. A few months before the writing of this article, on March 20, MakerDAO announced that the “Endgame Plan” would be divided into five phases.
Rune Christensen outlined the three main reforms in the Endgame proposal, including clear specific rules (implemented immediately after the Maker governance MIP proposal is passed), the implementation of "governance participation incentives" by the end of 2023, and the transfer of operational complexity from MakerDAO to SubDAO (implemented in 2024).
Here is a special explanation of SubDAO. SubDAO will serve as a semi-independent professional department in MakerDAO. Its main tasks include maintaining the decentralized front end, allocating DAI collateral, handling operational efficiency risks, marginal decision-making, experimenting with innovative products and operational plans, etc. SubDAO will use key governance processes and tools in MakerDAO to simplify its operations.
Under the framework of implementing Endgame, Maker will gradually stop maintaining the native treasury and let SubDAO stabilize the rate with a low base interest rate and generate DAI in batches from the Maker Protocol. SubDAO will also bear all costs, including employees, oracles, maintenance, upgrades and other expenses, and bear the first loss of all collateral exposure.
Next, the five stages can be divided into:
Phase 1 Beta Release: Continue to improve MakerDAO’s core product, the DAI stablecoin, and increase its scope and usability. Plans to launch more types of DAI to meet the needs of different users.
Phase 2 SubDAO Launch: In this phase, MakerDAO will release six new SubDAO products to expand the MakerDAO ecosystem. At the same time, MakerDAO will integrate with external projects and partners, including introducing new synthetic assets, expanding lending, deposit options, and more financial derivatives to expand its influence and usability in the decentralized financial ecosystem.
Phase 3 Governance AI Tools Release: Following the launch of SubDAO, MakerDAO will work to revolutionize governance within MakerDAO by introducing production-grade AI tools. Powered by Alignment Artifacts, these tools will improve decision-making and level the playing field between internal staff and community members.
Phase 4 Governance Participation Rewards Program: As the governance ecosystem becomes proficient in managing DAOs through governance AI tools, MakerDAO will launch a governance participation reward program to provide participants with financial rewards to promote community participation and consensus building.
Phase 5 Final Endgame State: The final phase will deploy a new blockchain, currently known as NewChain. The new chain will have the ability to use hard forks as a governance mechanism, and will also have optimization features that make it an "AI-assisted DAO governance process and AI tool user backend", including smart contract generation, state rent, and in-protocol MEV capture... and other features.
Rune also said that the launch of the new chain will be the final step in the Endgame release process. Once it is deployed, MakerDAO will permanently enter the endgame planning state, further major changes will become impossible, and its core processes and power balance will remain decentralized, self-sufficient and permanent.
Latest progress
On May 8, MakerDAO announced the Spark protocol, which aims to enhance the liquidity and profitability of the DAI stablecoin. That is, end-user, DAI-centric DeFi products deployed on Ethereum will have supply and borrowing functions for ETH, stETH, DAI, and sDAI, and all DeFi users can use the Spark protocol.
The Spark protocol is also an integral part of MakerDAO’s expansion into Endgame, which focuses on reshaping DAI into a free-floating asset collateralized by real-world assets.
二、AaVE GHO
Aave, a non-custodial liquidity market protocol known as the king of Defi lending, allows depositors to provide liquidity and earn passive income by depositing assets into Aave's public funding pool. On the other end, borrowers can freely borrow assets from the funding pool using a variety of methods, such as over-collateralization or uncollateralization. All credit activities on the platform can be carried out without any credit review. Not only is the liquidation efficiency high and the probability of bad debts is much lower than that of traditional lending models, Aave does not even have a repayment period.
Aave was founded on Ethereum in 2017. It has now expanded into a large-scale protocol that can span 7 chains. On January 27 this year, Aave V3 was officially launched on the Ethereum mainnet, completing the upgrade of 7 major chains. As a veteran DeFi protocol, its own token has increased by nearly 60% this year.
Back in July 2022, the Aave community released an ARC proposal to introduce a decentralized stablecoin GHO that is pegged to the US dollar, natively decentralized, and generated by over-collateralization. This coin can not only be launched first on the Aave protocol, but will also allow users to mint GHO based on the collateral they provide. As the lending leader in the DeFi field, the news that AAVE is going to launch a stablecoin is bound to attract a lot of attention.
GHO Development Stage
Phase 1: On July 28 last year, the Aave community proposed to issue the stablecoin GHO. Users can obtain interest income through the collateral in the AAVE protocol and generate the decentralized stablecoin GHO at the same time. When users want to redeem the collateral, they need to destroy the minted GHO to redeem it.
For AaveDAO, the GHO income belongs to DAO and the borrowing interest rate is determined by it. stkAAVE holders who participate in AAVE security module staking can enjoy discounted interest rates to generate GHO.
The difference here is that GHO's collateral can provide sustainable returns, and AAVE introduces the concept of a "facilitator". The facilitator is appointed by the AAVE community through governance, usually a protocol or institution. The facilitator can generate or destroy GHO without any collateral according to different strategies to achieve the purpose of regulating the market. For each facilitator, Aave Governance must also approve the so-called "bucket".
Buckets represent the upper limit of GHO that a particular facilitator can generate and the AAVE protocol itself will serve as the first facilitator.
Phase 2: The GHO issuance proposal was passed on July 31 last year with a 99.99% approval rate (501,000 AAVE). Aave then created the GHO stablecoin through the new Aave Improvement Protocol (AIP), and Aave DAO was responsible for managing it when the stablecoin was created, allowing users to mint GHO using the collateral they provided. The borrowing income of GHO will belong to Aave DAO, and Aave and GHO will be completely separated into two products.
With continuous research, market data analysis and community feedback, Aave has been iteratively upgraded to Aave 3 in terms of capital efficiency, protocol security, decentralization and user experience.
Here is a brief explanation of the Aave 3 upgrade. The launch of Aave V3 will further improve capital efficiency, security and cross-chain functionality, promote the development of the entire protocol ecosystem and enhance decentralization. Including: First, cross-chain asset flow (Portal), promote "cross-chain" transactions, allow assets to be seamlessly transferred on the Aave V3 market of seven chains, and solve the current problem of different liquidity needs of each chain; second, efficient mode (eMode), users use "similar" assets as collateral, which will significantly increase the borrowing limit; third, isolation mode (Isolation Mode), newly listed assets labeled "isolated" will have a borrowing limit limit, and can only lend specific assets, and cannot be used as collateral with other assets at the same time.
Therefore, through Isolation Mode, users can generate GHO using a variety of assets currently supported by the Aave Protocol while reducing risk through collateral security. Supply and borrowing caps also help reduce risk. For example, in a market downturn, as the price of collateral contracts rises, GHO demand increases, and users will borrow more GHO using other non-volatile collateral assets to repay their positions. This will increase the amount of GHO flowing into the market and reduce demand.
At the same time, the efficient mode (eMode) also allows stablecoin holders to exchange GHO at a ratio close to 1:1 with zero slippage. The cross-chain asset flow (Portal) allows GHO to be distributed across networks without trust, while being created on Ethereum with higher security. The entire process only requires simple message passing without the use of a bridge, thereby reducing the overall risk.
Phase 3: On February 9 this year, GHO was officially launched on the Ethereum Goerli testnet for developers and community users to access its interface to detect whether there are potential problems with its workflow. The testnet supports four assets: DAI, USDC, AAVE and LINK, and adds a new facilitator to support the FlashMinting mode, which can play the same role as flash loans and improve overall transaction efficiency.
To briefly explain, FlashMinting and flash loans, Aave is most well-known because it is the first protocol to create a "flash loan" service, allowing users to complete borrowing and lending within the "same block", allowing users to perform fast arbitrage operations, but flash loans can only complete all operations within one block. If the funds are not returned, all operations will be returned.
Simply put, when a user borrows a sum of money using a flash loan and does not repay the money, the funds will automatically roll back to the original place and return to the origin, because this operation is a failed work item in a block and cannot be transformed into a "real fact". Flash loans are generally used for arbitrage, and only need to pay the cost of GAS fee and flash loan agreement fee once. If there is a good arbitrage opportunity, users can use flash loans to obtain unlimited high profits. However, since flash loans need to complete all operations within a block, they need to use code to complete the operation of flash loans, and the threshold for use is relatively high.
Finally, it is worth mentioning the completeness of the audit. GHO has undergone four complete audits to ensure its security. Taking the latest ABDK review as an example, all codes were functionally tested and audited for security. Among the 85 categories, a total of 6 modification suggestions were proposed. According to the progress of GHO, there will be another security audit before it is officially launched.
in conclusion
Simply put, GHO is the assets that users deposit into the AAVE protocol for over-collateralization casting. Therefore, the growth in GHO demand will prompt more users to deposit assets in AAVE. In addition, stkAAVE holders who participate in the security module staking can get a discounted rate to cast GHO, which further encourages more users to participate in staking. At the same time, the increase in demand for AAVE makes the price of AAVE more favorable, and the interest generated by GHO has also become a new source of income for the AAVE protocol. Therefore, for AAVE, the launch of GHO directly enhances the overall competitiveness of AAVE to a great extent.
However, not all aspects point to advantages. The facilitator in AAVE has the right to mint GHO without any collateral, which is too concentrated. Once someone with ulterior motives intervenes, it may cause the risk of GHO decoupling. Even if AAVE sets up a bucket mechanism to limit the upper limit of GHO generated by the facilitato, both are elected through AAVE voting. If there is collusion of interests, the governance will shift significantly and become more and more centralized.
Finally, for holders who obtain a large amount of AAVE at a very low cost, GHO is equivalent to a perpetual motion machine of profit. In the future, there is a high risk that a large amount of AAVE will be cashed out using GHO to increase the market value of AAVE, causing a crash.
3. CRV crvUSD
The decentralized exchange Curve Finance was launched in 2020. The CurveDAO token (CRV coin) is the native token of the platform. All liquidity providers who have provided liquidity to Curve have the opportunity to receive rewards in its governance token CRV.
What makes Curve different from other DEXs on the market is that Curve mainly focuses on providing low-slippage trading services between different stablecoins (such as Usdt, Usdc, Dai), allowing users to reduce the exchange loss of tokens during the exchange process. Therefore, the Curve platform will not charge users too high a transaction fee. Curve's profit source lies in the issuance of stablecoins and lending platforms or financial derivatives platforms.
As of today (5/24), Curve has a locked amount of 4.02 billion US dollars. Previously, on 5/4, a public tweet stated that crvUSD has deployed smart contracts on the Ethereum mainnet, but the front-end UI interface has not yet been completed and is expected to be released to the public soon. According to Etherscan data, the crvUSD smart contract was successfully deployed on the Ethereum mainnet at around 3 am on 5/4, and 20 million crvUSD were minted through 5 transactions in a short period of time.
Then Curve CEO Michael Egorov lent 1 million crvUSD using 957.5 sfrxETH as collateral. By the way, after the news of the deployment of the stablecoin crvUSD on the Ethereum mainnet came out, Curve Finance's governance token CRV soared to US$0.975 in a short period of time, a direct increase of 6% within 24 hours.
Digging into the crvUSD operating mechanism from the white paper
Curve released a white paper last year to explore the overall operating mechanism. First of all, it has three core principles, namely "Lending-Liquidation Automatic Market Maker Algorithm (LLAMMA)", "PegKeeper" and "Monetary Policy". The first LLAMMA can be regarded as a dynamic lending and liquidation algorithm, that is, an automatic market maker introduced into lending and liquidation, so it is different from ordinary collateralized lending stablecoins. Normal collateralized lending is stable, like MakerDAO, which is over-collateralized. Users need to have sufficient collateral pledged in the vault before they can borrow a corresponding proportion of stablecoins according to the collateral ratio. If the value of the collateral falls to a certain extent, there will be a liquidation line. Once the liquidation line is exceeded, the collateral will be automatically sold by the system to repay the debt.
The LLAMMA proposed by Curve is still issued through over-collateralization, but a special-purpose AMM is used to replace the traditional lending and liquidation process. When the liquidation threshold is reached, the liquidation will not happen all at once, but will be converted into a continuous liquidation/de-liquidation process.
For example, borrow crvUSD with ETH as collateral. When the value of ETH is high enough, the collateral will not change, just like traditional collateral lending. When the price of ETH falls and enters the liquidation range, ETH begins to be gradually sold as it falls. After falling below the range, all of them are stablecoins, and there will be no change if they continue to fall, which is the same as other lending protocols.
However, in the middle of the liquidation range, if ETH rises, Curve will use stablecoins to help users re-buy ETH. If it fluctuates within the middle of the liquidation range, the liquidation and de-liquidation process will be repeated continuously, and ETH will be sold and bought continuously.
Compared with MakerDAO's one-time liquidation lending agreement, if the market rebounds after liquidation, in MakerDAO, users will only have a small residual value after liquidation, while in Curve they will buy ETH again during the rising process.
The above is how LLAMMA solves the mechanism of liquidating collateral, while PegKeeper and Monetary Policy are the mechanisms used by Curve Finance to anchor crvUSD at 1 USD.
Simply put, LLAMMA is Curve's algorithm for collateral liquidation. It reduces losses during liquidation by dispersing collateral across different price ranges. It dynamically liquidates collateral by creating arbitrage opportunities with a larger fluctuation range than external prices. When prices fall, collateral becomes crvUSD, and when prices rise, it becomes collateral.
After the crvUSD lending interface was officially launched, the complete data of the crvUSD liquidity pool can be seen on Curve’s front-end page. The current TVL of each liquidity pool is between 2 and 3 million US dollars.
四、SNX V3 sUSD
As an important partner of Optimism, Synthetix was deployed on Optimism as early as July 2021. Then Synthetix encouraged users to transfer the staked SNX to Optimism, and transactions and income gradually shifted from the Ethereum mainnet to Optimism. According to defilama 5/26 data, Synthetix ranked second on Optimism with a TVL of 149 million US dollars.
Synthetix's revenue mainly comes from Synths spot trading and perpetual contract trading. It was initially launched in the market as a synthetic asset platform, and it also set up a very special "debt pool" operation mechanism: users borrow sUSD by staking SNX, which is different from MakerDAO's collateralized assets to mint DAI. Although Synthetix will also liquidate when the SNX collateral ratio is insufficient (the current liquidation line is a collateral ratio of 160%), the underlying logic is completely different.
In Synthetix, all users who pledge SNX to mint sUSD share a "debt pool". When a user mints sUSD, the proportion of the amount of sUSD minted to the total amount of sUSD becomes the proportion of the user in the entire debt pool, and all minted sUSD is the debt of the entire system. Because everyone shares a debt pool, if other users increase the value of their assets through operations, the debt of the remaining users will increase. For example, if the appreciation rate of a user's assets is not higher than the system average, they will suffer losses.
It can be seen that Synth in Synthetix relies on the oracle Chainlink to provide prices, but the update of the oracle price on the chain will completely lag behind the spot market price, which indirectly poses the risk of front-running.
Synthetix was aware of this risk and in 2021 directly utilized oracle-fed price exchanges without having to consider deep slippage-free transactions, officially starting a new narrative of atomic swaps.
Atomic swaps allow users to atomically exchange assets by pricing Synths through a combination of Chainlink and DEX oracle Uniswap V3 (representing the latest spot price). In simple terms, with Synthetix composability, stakers are also protected from front-running attacks.
In June 2022, Synthetix announced that 1inch has integrated Synthetix's atomic swaps, allowing trading users to enjoy better liquidity and SNX stakers to earn additional fees.
The Synthetix Perps V2 solution was launched in December of the same year, which can reduce fees, improve scalability and capital efficiency.
From Synthetix to Synthetix V2 to today's Synthetix V3, the team has demonstrated an extremely efficient update capability, which not only meets various customized needs, but also reflects the ambition to make Synthetix a liquidity center.
Currently, the functions of Synthetix V3 are gradually being launched, which is a comprehensive reform of the protocol by the team from scratch.
Differences before and after V3 upgrade
Improvement 1: Pegged Stablecoin snxUSD
Synthetix V3 will launch a new stablecoin snxUSD to solve the problem of insufficient scalability and even possible decoupling of sUSD in the past.
snxUSD before the upgrade: Even though most sUSD is minted by staking SNX, Synthetix has also enabled the over-collateralized WETH to mint snxUSD. However, when the sUSD price is slightly higher or lower than $1, there is often a lack of immediate arbitrage activities to get the price back to $1, which results in a small number of users using it.
Upgraded snxUSD: The new version of Synthetix V3 allows snxUSD and part of the collateral to be swapped 1:1, which allows users to limit the price of sUSD to a small range through arbitrage activities alone. At the same time, this minting method designed for convenience may also increase the issuance of snxUSD.
Improvement 2: Reward Distribution and Liquidation
Upgraded snxUSD: allows pool owners to use the reward manager to distribute rewards to users, which can be based on the staking ratio or refer to factors such as staking time to provide a more flexible value distribution plan.
Synthetix V3 also proposes a liquidation mechanism where the collateral and debt of the liquidated position are distributed among other participants in the vault. If the entire vault is liquidated, all collateral will be collected by the system and sold to repay the debt.
Improvement 3: Isolating the Debt Pool
snxUSD before the upgrade: In the existing Synthetix V2, all transactions must go through a single SNX debt pool, and because of many risks that need to be considered, most functions are restricted, such as the snxUSD minting method mentioned at the beginning.
Upgraded snxUSD: Synthetix V3 introduces the concept of pools, allowing stakeholders to customize their risk exposure to specific markets, allowing the risks and returns of debt pools to be differentiated. Governance can determine the collateral type and upper limit of each pool, so that even if risks arise, they can be limited to a small range. It also provides SNX stakers with the opportunity to take higher risks and obtain higher returns.
in conclusion
Currently, functions such as atomic transactions are rarely used, but the demand for Perp V2 is strong. Synthetix V3 will be more flexible and meet various customized needs while limiting risks to a small range. The new stablecoin snxUSD is easier to mint and its price is easier to anchor at $1.
The launch of Synthetix V3 represents a major milestone for the protocol, and it remains to be seen whether this radical reform can become a new narrative for a permissionless derivatives liquidity platform for the next generation of on-chain financial products.
V. Conclusion
