Just a few months ago, the global financial sector witnessed the meteoric rise of yield farming, which has largely helped spur the growth of the field of decentralized finance. In Q3 2020 alone, the DeFi market ushered in significant growth for many Ethereum compatible (ETH) stable coins, such as MakerDAO’s Dai.
According to information released by crypto market data aggregator Messari, the overall supply of stablecoin Dai increased by a gigantic 623% in the third quarter, propelling the value of the token above $ 1 for 120 days. consecutive. The report also adds that 65% of Dai’s total token supply is currently used for yield farming purposes through various DeFi protocols.
That being said, it appears that liquidity incentives on the decentralized exchange Uniswap have dried up, with the platform recently offloading 40% of its liquidity in just 48 hours before the conclusion of its liquidity rewards program. UNI on November 17th. This has led many users to switch to competing platforms such as Sushiswap.
As for the situation, Carlsbad Sunshine, CEO of LID Protocol, a platform providing solutions for depositing cash into Uniswap, told TBEN that all DeFi projects follow a cycle of hype with highs and lows. The key is continued growth with each cycle, which is clear in Uniswap’s case, he said:
“That’s why we always use Uniswap to freeze cash. It’s by far the biggest platform out there, but there are a lot of scams going on. Ideally, Uniswap would upgrade with better features to indicate which tokens have a liquidity lock and which do not. My personal opinion is that Uniswap is going to last a long time, and the pooling can evolve, but it is not going to stop.
Can DEXs fall out of favor?
Providing his take on this latest liquidity crisis, Kyn Chaturvedi, director of business development at TomoChain, a scalable blockchain platform that also manages TomoDEX, told TBEN that when it comes to liquidity-based incentives , customers will flock to where the rewards are. He added:
“It doesn’t make sense to think that liquidity will dissipate and return to CEXs. Liquidity is more likely to move around DeFi to seek out the alpha. Why? The trustless, anonymous and easy access nature that comes with DEX / DeFi works and because centralized exchanges have been much less secure with high-level hacks and recent accusations of fraudulent activity.
That being said, Chaturvedi acknowledged that while a good chunk of DeFi scam projects have cropped up in the last six months or so, the technology as a whole has so much potential that consumers have not lost faith in it.
Nischal Shetty, CEO of India-based cryptocurrency exchange WazirX, believes that the main intention of liquidity farming from the very beginning was simply to attract users, giving them the opportunity to try DEXs and figure out how to use them: decrease in liquidity when mining rewards stop, I don’t think there will really be a decrease in use because people who want to buy / sell crypto through DEX, and have discovered the DEX, will stay behind.
Changes coming for Uniswap?
Following a sharp decline in Uniswap’s liquidity, many of the platform’s token holders submitted a new governance proposal to roll out a new rewards program. In this regard, a proposal put forward by Audius, a blockchain-powered music streaming provider, aims to halve the total number of UNI reward tokens compared to previous incentive programs.
While previously 2.5 million UNI tokens were distributed among the liquidity providers of Uniswap’s WTBC / ETH, USDC / ETH, USDT / ETH and DAI / ETH pools per month, the new proposal will effectively reduce this number of rewards to 1.25 million UNI for the next two. months – approximately 4.6% of UNI’s current token pool.
As it stands, the proposal has more or less passed the first ballot. However, for the proposal to enter fully into force, it must pass two more ballots and obtain a minimum of 40 million “affirmative votes” to be implemented.
Finally, UniSwap’s proposal went live at the same time as its rival DEX SushiSwap ad a new incentive system to provide liquidity to the exact four pairs for which Uniswap has ceased to provide benefits. Also, it should be noted that since governance on UniSwap was fully decentralized in mid-September, the platform has failed to adopt a single governance proposal.
DeFi is here to stay?
The advent of governance tokens not only inspired members across the crypto industry to educate themselves, but also revived the concept of DEXs as a whole. On a monetary level, they are also the reason the crypto industry has grown from $ 1 billion in total value stuck in DeFi at the end of 2019 to well above $ 13.5 billion.
In Chaturvedi’s view, a wider scope should be used to determine what DEXs hope to achieve, as most of these platforms intend to lock in liquidity in order to create new financial instruments. generation on them: “It’s well done, TVL will not do it. be limited to serving only the crypto space. This will be the genesis of a new financial paradigm that will allow the rest of the non-crypto world to access global liquidity on scales never before seen in our history.
Additionally, since DEXs, by their very nature, must be highly transparent and trustless, the possibilities for cheating – which most traditional financial institutions possess – can almost be eliminated. Plus, even returns on paper can be higher for lenders and lower for borrowers.
Finally, as a by-product of the DeFi boom, it looks like governance tokens are now being used for reasons they were originally intended: to help a project’s community make better decisions by giving users their own. a say in matters affecting the platform. Speaking on the subject, Shetty said, “Even as the rewards continue, it’s a good sign because you are giving people what they want from the product. It’s a win-win situation for the token as well as for the ecosystem. “
It’s not DEX vs CEX
Centralized and decentralized exchanges are often pitted against each other as direct competitors. However, users have a clear choice: if people don’t want to keep their crypto themselves, a centralized exchange is the right option for them. If people want to keep their crypto on their own, decentralized exchanges are the way to go. Therefore, UniSwap’s recent loss of liquidity may not hinder DEX progress.
Additionally, perhaps it should be a conversation about how the two types of exchanges can coexist in relation to various crypto audiences. That being said, Sunshine believes that in the future DEX will replace the growth of CEXs. For example, he pointed out that the governance of Uniswap V3, Ethereum 2.0 and UNI is imminent, a development that will most likely continue to fuel the rise of DeFi:
“DEX continues to be launched in competition with Uniswap, and third party platforms such as Crypto Wallets will help fuel this transition through DEX aggregation services. What we are seeing is not just a momentary phase of the hype, but rather an evolution. “