Written by: DeSpread Research
Disclaimer: The contents of this report reflect the opinions of the respective authors and are for informational purposes only and do not constitute a recommendation to buy or sell tokens or use the protocol. Nothing in this report constitutes investment advice and should not be construed as such.
1. Introduction
Decentralized Finance (DeFi) is a new form of finance that aims to enable trustless transactions without intermediaries through blockchain and smart contracts, increase access to financial services in areas lacking financial infrastructure, and disrupt the traditional financial system by improving transparency and efficiency. The origin of DeFi can be traced back to Bitcoin developed by Satoshi Nakamoto.
During the global financial crisis in 2008, Satoshi Nakamoto was disturbed by the news of bank failures and government rescues of banks. He believed that over-reliance on trusted institutions, opacity and inefficiency were the fundamental problems of the centralized financial system. To solve this problem, Satoshi Nakamoto developed Bitcoin, a system that provides value transfer and payment in a decentralized environment. Satoshi Nakamoto added the message "The Times, January 3, 2009, UK Chancellor of the Exchequer on the verge of a second bailout for banks" to the genesis block of Bitcoin, indicating the problems that Bitcoin is going to solve and the need for decentralized finance.
Bitcoin Genesis Block and the front page of the London Times, source: phuzion7 steemit
Since then, the emergence of Ethereum in 2015 and the introduction of smart contracts have spawned a series of DeFi protocols. Until now, these protocols can provide financial services such as token swaps and loans without intermediaries, and continue to conduct large-scale trials and research around the concept of "decentralized finance" proposed by Satoshi Nakamoto. These protocols have formed a huge ecosystem through the ability to combine and connect with each other like "MoneyLego", and have realized a wide range of financial transactions that Bitcoin cannot provide in a decentralized form, opening up the possibility of replacing the role of trusted institutions in the traditional financial system with blockchain.
However, so far, most of the rapidly growing liquidity in the DeFi market still comes from the yields provided by various protocols to liquidity providers, rather than from decentralization or financial system innovation. In particular, these protocols, with their own token economy, provide users with various incentives beyond traditional finance through the so-called "yield farming", which effectively attracts many users and plays a big role in bringing liquidity into the DeFi market.
As users pay more and more attention to higher yields, the revenue model of DeFi protocols has also been evolving from its initial design, from the initial revenue model designed with the core value of "providing financial services without intermediaries" to the market demand of "continuously providing users with stable and high returns". Recently, there have even been some protocols that borrow centralized elements, distributing the generated income to users by using real-world assets as collateral or executing transactions through centralized exchanges.
In this article, we will explore the various mechanisms and evolution of DeFi and gain an in-depth understanding of the challenges faced by these DeFi protocols to the partial adoption of centralized elements.
2. Liquidity Mining and DeFi Summer
The early DeFi protocols that emerged on the Ethereum network focused on implementing the traditional financial system on the blockchain. Therefore, in addition to using blockchain to change the trading environment, removing service providers in the process and allowing anyone to become a liquidity provider, the early DeFi protocols were no different from traditional finance in terms of revenue generation and structure.
Decentralized Exchanges (DEX): Like currency exchanges and stock exchanges, they generate revenue through trading fees. Users receive a percentage of each token trade, which is distributed to liquidity providers.
Lending protocols: Similar to banks, they earn income from the interest rate differential or margin between depositors and borrowers. Depositors provide assets to the protocol and receive interest, while borrowers provide collateral to borrow and pay interest.
Subsequently, in June 2020, the most representative lending protocol Compound launched a liquidity mining activity to attract liquidity in the market before and after the Bitcoin halving. By issuing governance tokens $COMP and distributing them to liquidity providers and borrowers, it caused a large amount of liquidity and lending demand on Compound.
Compound TVL changes, source: Defi Llama
Under Compound's initiative, the DeFi protocol began to change from the original trend of simply distributing protocol revenue to liquidity providers. Other early DeFi projects such as Aave and Uniswap also began to issue their own tokens to pay rewards other than protocol revenue. Since then, the DeFi ecosystem has begun to welcome a large number of users and liquidity, bringing the "DeFi Summer" we all know to the entire Ethereum network.
3. Limitations of Liquidity Mining and Improvements in Token Economics
Liquidity mining provides a strong incentive for service providers and users to use services, greatly improving the liquidity of DeFi protocols and expanding the user base. However, the additional income generated through liquidity mining in the early stage has the following limitations.
The utility of issued tokens is limited to governance, so there is a lack of buy-in factor.
The drop in token prices leads to a drop in liquidity mining rates.
These limitations make it difficult to maintain the liquidity and user traffic attracted by liquidity mining in the long term. Subsequent DeFi protocols have attempted to establish a token economic model that allows them to provide liquidity providers with additional benefits beyond protocol revenue, while also maintaining the liquidity of the introduced protocols in the long term. Many protocols link the value of their own tokens to the protocol's revenue and provide continuous incentives to token holders, thereby improving the stability and sustainability of the protocol.
Curve Finance and Olympus DAO are two of the best examples of this.
3.1. Curve Finance
Curve Finance is a DEX that features low slippage trading for stablecoins. Curve provides liquidity providers with its own token $CRV and transaction fees taken from the liquidity pool as rewards for liquidity mining. However, Curve Finance improves the sustainability of liquidity mining by introducing the “veTokenomics” system.
Vetokenomics in detail
Liquidity providers only charge 50% of the transaction fees. They will not sell the $CRV obtained from liquidity mining to the market, but deposit it in Curve Finance according to the set period (up to 4 years) and obtain $veCRV.
Users holding $veCRV can earn 50% of the transaction fees generated by Curve Finance and further increase liquidity mining rewards by participating in voting in liquidity pools.
Curve Finance allows liquidity providers to lock up their earned $CRV tokens for a long time, thereby reducing selling pressure. In addition, by introducing a voting function that allows specific liquidity pools to receive additional rewards, it increases the demand for projects that want to provide liquidity for Curve Finance to buy and hold $CRV in the market.
As a result of these effects, the lock-up ratio of $CRV tokens grew rapidly, reaching 40% within a year and a half, and has remained there ever since.
$CRV lock rate trend, source: @blockworks_research Dune Dashboard
This mechanism of Curve Finance is considered a good attempt. It not only provides high returns to ensure liquidity in the short term, but also pursues sustainability by closely integrating its tokens with the working mechanism of the protocol. It has become a source of inspiration for the token economic model of many subsequent DeFi protocols.
3.2. Olympus DAO
Olympus DAO is a protocol that aims to create a token for on-chain reserves. Olympus DAO receives liquidity deposits from users to build and manage reserves, and issues its own protocol token $OHM in proportion to the reserves. In the process of issuing $OHM, Olympus DAO introduced a unique mechanism of "bonding", which allows users to deposit LP tokens containing $OHM and issue bonds corresponding to $OHM.
Token Economic Details
Users can deposit LP tokens consisting of a single asset (such as Ethereum, stablecoins, or OHM-asset pairs) and receive discounted OHM bonds in return. Olympus DAO will manage these assets through governance and earn returns.
By staking $OHM on Olympus DAO, $OHM holders receive a portion of the protocol reserve growth in the form of $OHM tokens.
Through the above mechanism, Olympus DAO provides sufficient $OHM to the market, while also directly holding LP tokens with ownership of the liquidity pool to prevent traditional liquidity providers from easily withdrawing liquidity in pursuit of short-term gains. In the early days of the protocol, a large amount of liquidity poured in and reserves were increased. In the process of issuing more $OHM to pay holders, the annual yield (APY) exceeded 7,000% and lasted for about six months.
Olympus DAO Staking APY, Source: @shadow Dune Dashboard
These high annual interest rates incentivize users to continue depositing assets into the Olympus DAO vault to mint $OHM, triggering the launch of many DeFi protocols using the Olympus DAO mechanism in 2021.
4. The DeFi bear market and the rise of real returns
The rise of DeFi protocols pushed the total TVL (total value locked) of the DeFi market to an all-time high in November 2021. However, the market subsequently entered a correction phase, with liquidity inflows gradually decreasing, culminating in the collapse of the Terra-Luna ecosystem in May 2022, leading to a full-blown bear market. This reduced liquidity across the market, dampening not only investor sentiment, but also early and second-generation DeFi protocols such as Curve Finance and Olympus DAO.
TVL trend of the overall DeFi protocol, source: Defi Llama
Although the token economic models adopted by these protocols have overcome the limitation of the lack of utility of their own tokens to a certain extent, there is still the problem that the value of their own tokens will affect the interest rates of liquidity providers. Especially in an environment where the market environment is constantly changing and investment sentiment has dropped significantly, the returns of these protocols cannot keep up with the continuous expansion of tokens, which shows the structural limitations of these protocols.
As a result, the reduction in token value and protocol revenue accelerates the outflow of assets deposited in the protocol, leading to a vicious cycle that makes it difficult for the protocol to generate stable revenue and provide attractive interest rates to users. In this context, "Real Yield" DeFi protocols that can significantly limit the inflation rate of their own tokens while generating sustainable revenue for the protocol have become a new focus.
4.1. GMX
One of the most well-known real-yield DeFi protocols is the GMX Protocol, a decentralized perpetual contract exchange based on the Arbitrum and Avalanche networks.
The GMX protocol has two tokens, $GLP and $GMX, and its operating mechanism is as follows.
Liquidity providers who deposit assets such as $ETH, $BTC, $USDC, $USDT into GMX can obtain $GLP tokens as proof of providing liquidity, and $GLP holders can obtain 70% of the profits generated by the GMX protocol.
$GMX is the governance token of the GMX protocol, and its stakers can get discounts on GMX transaction fees and linearly receive 30% of the profits generated by the GMX protocol within one year.
Instead of providing additional rewards through token inflation, the GMX protocol chooses to distribute a portion of the revenue generated by the protocol to its own token holders. This approach provides clear incentives for users to buy and hold $GMX, thereby ensuring that token holders will not sell tokens for profit or face inflation devaluation during market downturns.
If we actually observe the changes in the revenue of the GMX protocol and the price of the $GMX token, we will find that the value of the $GMX token will rise and fall with the revenue of the GMX protocol.
GMX protocol revenue and token price trends, Source: Defi Llama
However, compared to traditional protocols, this structure allocates part of the fees that liquidity providers deserve to governance token holders, which is somewhat disadvantageous to liquidity providers and is not ideal for attracting initial liquidity. In addition, when distributing governance tokens $GMX, the GMX protocol focuses on promoting the GMX protocol to potential users by airdropping to DeFi users of Arbitrum and Avalanche, rather than using liquidity mining activities to quickly obtain liquidity.
Despite this, the GMX protocol is currently still the protocol with the highest TVL among derivative DeFi protocols, and is also one of the few platforms that has maintained its TVL after the bear market after Luna-Terra.
GMX protocol TVL trend, source: Defi Llama
Compared with other DeFi protocols, although the structure of the GMX protocol is somewhat unfavorable to liquidity providers, the GMX protocol can still perform well for the following reasons.
As a perpetual contract exchange that emerged during the heyday of the Arbitrum network, it took the lead in seizing the liquidity and user traffic within Arbitrum.
After the FTX bankruptcy in December 2022, market confidence in centralized exchanges declined, leading to an increase in demand for on-chain exchanges.
The GMX protocol is able to offset its structural disadvantages to some extent based on these external factors, so it is difficult for subsequent DeFi protocols to replicate the structure of the GMX protocol while attracting liquidity and users.
On the other hand, Uniswap, a decentralized exchange that emerged in the early days of DeFi, is discussing the introduction of a Fee Switch mechanism to distribute protocol revenue to holders and liquidity providers of $UNI tokens previously distributed through liquidity mining. From this, it can be seen that Uniswap is also exploring the conversion to a real-income DeFi protocol. However, this is only possible because Uniswap, as one of the earliest projects, has already obtained sufficient liquidity and trading volume.
From the cases of GMX Protocol and Uniswap, we can observe that the use of real income and the distribution of protocol income to both liquidity providers and token holders should be carefully considered based on the maturity of the protocol and its position in the market. Under this model, how to ensure liquidity is the most important challenge, which is why early projects have not been widely adopted.
5. RWA: An attempt to integrate traditional financial instruments into DeFi
As the bear market continues, how to attract limited liquidity through token economics while ensuring the sustainability of protocol returns remains the biggest challenge facing DeFi protocols.
In September 2022, after Ethereum transitioned from the original Proof of Work (PoW) to Proof of Stake (PoS) through The Merge update, liquidity protocols that assist users in participating in Ethereum staking to distribute user interest have emerged one after another. This change makes Ethereum's 3% interest the most basic default interest rate, forcing emerging DeFi protocols to increase sustainable returns in order to attract liquidity and maintain the environment of the protocol.
In this context, protocols based on real world assets (RWA) began to emerge. By linking traditional financial instruments to the blockchain and generating income outside the blockchain environment, such protocols naturally became an alternative solution in the DeFi ecosystem that can also generate sustainable income.
RWA refers to linking any traditional financial instrument to assets on the blockchain. By tokenizing real-world assets, users can use them in an on-chain environment. This protocol that connects blockchain and traditional finance can benefit in the following ways.
Record asset ownership and transaction history more transparently than traditional systems.
Improve inclusiveness of financial services without restrictions based on geography, status or other criteria.
Provide flexible and efficient transaction forms, such as micro-splitting or integration with DeFi protocols.
These advantages have led to a wide range of RWA use cases, including bonds, stocks, real estate, and unsecured credit loans. Among them, the tokenization of U.S. Treasury bonds has attracted the most attention, while meeting users' needs for stable value and returns.
Currently, there are approximately $1.57 billion in tokenized Treasury assets on the chain, and RWA has become an important link in the DeFi market as global asset management companies such as BlackRock and Franklin Templeton have entered this field.
Market capitalization trends by US Treasury tokenization instrument, source: rwa.xyz
Next, we will give examples of DeFi protocols that use the RWA model to provide returns to users.
5.1. Goldfinch
Goldfinch is a lending protocol that has been pioneering the integration of DeFi and traditional financial products since July 2020. Based on its proprietary credit scoring system, the protocol provides unsecured cryptocurrency loans to real businesses around the world. These borrowers are mainly located in developing countries such as Asia, Africa, and South America. The total amount of funds loaned and in operation is currently approximately US$76 million.
Goldfinch has two different loan pools.
Junior Pool: Established after borrowers apply for loans and pass the review. Verified entities such as professional investment institutions and credit analysts deposit funds in the pool to lend to these borrowers. In the event of a default, funds from the junior pool will be used first to cover losses.
Senior Pool: A single pool of funds with positions spread across all junior pools, with the priority given to protecting principal, and paying a lower return than the junior pool.
After completing the KYC process, users can deposit $USDC into the premium lending pool to receive a share of the revenue generated by Goldfinch through credit-collateralized lending, and receive $FIDU tokens as proof of providing liquidity. When users want to exit, they can only deposit $FIDU and get $USDC back if there is idle funds in the premium lending pool. If there is no idle funds in the premium lending pool, users can still sell $FIDU on DEX to achieve the same effect. Conversely, users can also buy $FIDU tokens on DEX and receive the revenue generated by Goldfinch without KYC.
In the early days of its launch, Goldfinch distributed its governance token $GFI through liquidity mining, raising a large amount of liquidity. Even after the end of liquidity mining activities and the market downturn after the Luna-Terra incident, Goldfinch was still able to obtain stable net income from external sources, providing liquidity providers with a stable expected interest rate of about 8%.
However, since August 2023, Goldfinch has defaulted three times, exposing problems such as poor credit assessment and lack of up-to-date loan information, and questioning the sustainability of the protocol. In response, liquidity providers began to sell their $FIDU tokens to the market. Considering the revenue that the protocol can generate, the price of $FIDU should rise, but as of June 2024, the value of $FIDU is currently maintained at $0.6, down from $1.
5.2. MakerDAO
MakerDAO is an earlier Collateralized Debt Position (CDP) protocol in the Ethereum DeFi ecosystem. It aims to issue and provide users with stablecoins with collateralized stable value to cope with the drastic fluctuations in the cryptocurrency market.
Users can pledge virtual assets such as Ethereum to MakerDAO as collateral and receive $DAI in return. MakerDAO continuously monitors the value fluctuations of the collateral assets to measure the collateral ratio and liquidates the collateral assets when the collateral ratio falls below a certain level to maintain a stable reserve.
MakerDAO has two main revenue models.
Stability Fee: A fee paid by users who deposit collateral and issue and borrow $DAI.
Liquidation Fee: A fee charged when a $DAI issuer’s collateral assets are forced to liquidate because their value falls below a certain level.
MakerDAO has a mechanism to incentivize $DAI holders by paying these fees as interest to users who deposit $DAI into the MakerDAO deposit system “DSR Contract” and using any remaining capital to purchase and burn MakerDAO’s governance token $MKR to incentivize $MKR holders.
5.2.1. Endgame and RWA Introduction
In May 2022, MakerDAO co-founder Rune Christensen proposed the "Endgame" plan, expressing his long-term vision for true decentralization of MakerDAO governance and operations and the stability of DAI.
For further reading on "Endgame," see the Endgame series published by DeSpread.
As mentioned in Endgame, one of the key challenges to ensure the stability of $DAI is to diversify the mortgage assets currently dominated by $ETH, and MakerDAO has released a plan to introduce RWA as a mortgage asset to achieve this. The following advantages.
RWA has price volatility characteristics different from crypto assets, which can achieve portfolio diversification.
RWAs backed by real-world assets help reduce friction with regulators and gain the trust of institutional investors.
RWA strengthens the MakerDAO protocol’s connection to the real economy and can ensure the long-term stability and growth of $DAI beyond the chain.
After the Endgame proposal is passed, MakerDAO’s relationship diagram looks like this.
After the Endgame proposal was passed, MakerDAO diversified its portfolio by introducing various forms of RWA, including short-term U.S. Treasury bonds, real estate-backed loans, tokenized real estate, and credit-backed assets. Since the income from RWA is determined by external factors such as Treasury bond rates and off-chain lending rates, MakerDAO has reduced the impact of cryptocurrency market fluctuations through the integration of RWA, while obtaining a source of stable returns.
It is also because of this that in 2023, even when the entire DeFi ecosystem experienced a bear market, MakerDAO's RWA guaranteed assets were able to continue to generate stable returns, accounting for 70% of the protocol's total returns. Based on these gains, MakerDAO was able to increase the interest rate of DSR from 1% to 5%, effectively supporting the demand for $DAI.
In this way, MakerDAO started with a protocol for issuing stablecoins secured by on-chain assets, and by engaging with real-world finance, it has diversified its revenue sources and strengthened its connection with the real economy. This ensures the sustainability and long-term growth of the protocol, making MakerDAO the leading RWA protocol and pointing a new direction for the integration of traditional finance and DeFi.
6. Basis Trading: An Attempt to Utilize CEX Liquidity
In the fourth quarter of 2023, due to the expected approval of the Bitcoin spot ETF, external liquidity began to flow into the market after nearly two years of stagnation. This prompted the DeFi ecosystem to break away from the traditional passive management structure and use the inflow of liquidity and its own token incentive mechanism to provide higher interest rates to introduce new liquidity.
But unlike early projects, these protocols did not carry out the liquidity mining that was popular in the early stages. Instead, they adopted a model of airdropping based on points to increase the interval between the initial period of attracting liquidity and the airdrop, so that the team can better manage the circulation of their own tokens.
Some protocols also use the "Restaking" model to quickly attract huge liquidity, using tokens that have been pledged to other protocols as pledged assets again to stack risks and generate additional income.
Although the cryptocurrency market has recovered after the Luna-Terra crisis, the high barrier to entry into the on-chain environment has resulted in most of the market liquidity and user traffic still being concentrated on CEXs rather than DeFi protocols.
In particular, CEX provides users with a relatively familiar and simple trading environment, which has caused the trading volume of on-chain perpetual contract exchanges to drop to about 1/100 of CEX futures trading volume. This environment has led to the rise of the Basis Trading model protocol that uses CEX's trading volume and traffic to create additional income.
Comparison of futures trading volume between CEX and DEX, Source: The Block
The basis trading model uses the assets deposited by users to create positions and generate income by capturing the price difference between spot and futures or futures of the same asset on CEX, and distributes it to liquidity providers. Compared with the RWA model that generates income directly from traditional finance, the advantage of these models is that they are less regulated, so they can build the protocol structure more freely and adopt more active market strategies.
In the past, virtual asset custodians such as Celsius and BlockFi also used the leverage of liquidity providers’ deposited assets on CEX to create and distribute income. However, due to opaque fund management and over-leveraged investments, Celsius went bankrupt after the market crash in 2022. The model of custodians managing deposited assets lost credibility in the market and gradually disappeared.
Therefore, the basis trading model protocols that have emerged in recent years have all been striving to make the operation of the protocols more transparent than traditional custodians and to set up various devices to supplement their credibility and stability.
Next, we will explore some protocols that use basis trading to provide returns to users.
6.1. Athena
Ethena is a protocol that issues a synthetic USD asset $USDe worth $1. Ethena uses CEX futures to hedge its collateral assets to ensure that the collateral ratio does not change with the value fluctuations of the collateral assets to maintain a Delta Neutral state. The protocol can issue USD equivalent to the collateral assets and is not affected by market fluctuations.
The assets deposited by users on Ethena are distributed through OES (Off-Exchange Settlement) providers in the form of $BTC, $ETH, interest-earning Ethereum LST tokens, and $USDT. Ethena then hedges by opening a short position on CEX equivalent to the $BTC and $ETH spot collateral assets it holds to maintain a Delta-neutral state for the assets it holds.
Ethena pledged asset ratio, source: Ethena
In the process of pledging USDe, Ethena can obtain two kinds of returns.
LST interest: The interest generated from Ethereum validation rewards is maintained at an annual rate of more than 3%, and will increase with the increase in Ethereum ecosystem activity. This income can bring a return of about 0.4% per year to the total spot collateral assets.
Funding Fee: The fee paid by users holding overheated positions to users holding opposite positions to close the gap between spot and futures prices on CEX (given that long positions are uncapped and at a disadvantage compared to short positions, long users pay 0.01% to short users every 8 hours as the basic contract funding rate). Currently, short futures positions held on Ethereum can earn 8% per year on open positions.
In addition to distributing the revenue generated from basis trades to $USDe holders, Ethena is also conducting a second airdrop of its governance token $ENA. During this process, Ethena distributes more points to holders than to $USDe stakers to ensure that protocol revenue is concentrated among a small number of stakers, making the interest rate for $USDe staked equivalent to 17% on June 20, 2024.
In addition, by announcing that more airdrops will be provided to $ENA stakers in the future, the selling pressure of $ENA was alleviated and initial $ENA liquidity was attracted. As a result of these efforts, approximately $3.6 billion of $USDe has been issued to date, making it the fastest stablecoin to reach a market value of $3 billion.
How long it takes for stablecoins to reach a market cap of $3 billion. Source: @leptokurtic_’s Twitter
6.1.1. Limitations and Roadmap
Although Ethena has achieved some success in quickly gaining initial liquidity, it faces the following limitations from a sustainable development perspective.
Once the points campaign ends, the demand for Ethena will decrease, resulting in a decrease in staking income.
The interest rate from the contract funding rate is variable and fluctuates with market conditions, and may fall especially in a bearish market when short positions increase.
Currently, the only reason to stake $ENA into Ethena is to earn extra $ENA, so $ENA could face significant selling pressure following the airdrop event.
To prevent $USDe and $ENA from losing liquidity, a partnership with staking protocol Symbiotic was recently announced as a first step to increase the utility of both tokens by earning additional income through staking of $USDe and $ENA on PoS intermediary protocols that require a security budget.
Here are Ethena’s current relationships.
Ethena is improving the transparency of existing asset custodians by disclosing the wallet addresses of OES providers and publishing reports on positions and asset holdings to prove the stability of assets. In addition, Ethena also plans to use ZK technology to verify all assets held by OES providers in real time to further improve transparency.
6.2. BounceBit
BounceBit is a PoS-based L1 network that generates additional revenue by running Delta-neutral positions on centralized exchanges (CEX) using the assets bridged by users. Starting June 2024, users can bridge two assets from other networks to BounceBit, including $BTCB and $USDT.
The assets bridged by users will be traded on CEX through asset management entities, and BounceBit will pay users with Liquid Custody Tokens $BBTC and $BBUSD available on the network at a ratio of 1:1 as proof of pledge. Users can use the received $BBTC to stake with BounceBit's native token $BB to assist in network verification, and the staking users will receive liquidity tokens $stBBTC and $stBB proving the pledge, as well as interest paid in $BB.
Users can also earn additional income by re-staking $stBBTC on Shared Security Clients (SSC) that work with BounceBit, or deposit it into the Premium Yield Generation Vault to receive the yield generated by BounceBit basis trading. Currently, the function of re-staking to SSC is not yet open, and additional yield can only be obtained through the Premium Yield Generation Vault.
BounceBit user fund flow diagram, source: BounceBit Docs
When users deposit assets into the Premium Yield Generation Vault, they can choose from which of the five asset managers that work with BounceBit to receive the profit. When these asset managers use BounceBit’s bridged assets on CEX, they use the MirrorX function to execute transactions without actually depositing the assets on CEX. BounceBit also regularly publishes asset status reports to ensure the stability and transparency of bridged assets.
BounceBit Premium Yield Generation Vault Partners, Source: BounceBit
Currently, BounceBit’s highest yield is 16%, which includes 4% network staking interest and 12% Premium Yield Generation Vault’s yield, which is quite high for a commodity with BTC as the underlying asset. However, the sustainability of these yields remains to be seen, as staking interest will fluctuate with the price fluctuations of $BB, and the yield of the underlying transaction also depends on market conditions.
Compared with the DeFi ecosystem, protocols that adopt this emerging basis trading model use CEX's trading volume and liquidity to generate stable income, which constitutes a key part of the stability of protocol income. Not only that, it can also be seen that these protocols also provide additional income to users through active DeFi protocol strategies such as liquidity of pledged assets (to facilitate use on other protocols) and issuance of their own tokens.
7. Conclusion
In this article, we explored the evolution of yield models in the DeFi ecosystem and also looked at protocols that maintain yield and liquidity by adopting elements such as RWA and basis trading. Considering that both RWA and basis trading models are still in the early stages of adoption, we can expect this model to become more and more influential in the DeFi ecosystem.
Although RWA and basis trading models borrow centralized elements, their common goal is to bring assets and liquidity outside the DeFi ecosystem into the DeFi protocol. In the future, the development of on-ramp and off-ramp solutions to a certain extent and changes centered on cross-chain interoperability will replace these centralized factors, improve the convenience of users in the DeFi ecosystem, and continue to lead the innovation of new DeFi protocols based on the increase in blockchain usage.
Although these centralized elements account for the main part in the current DeFi ecosystem and are somewhat contradictory to Satoshi Nakamoto’s creation of Bitcoin to solve traditional financial problems, considering that the modern financial system is developed based on capital efficiency , it can be explained that it is natural that DeFi, as a new type of finance, will undergo this transformation.
As DeFi moves towards centralization, we will continue to see the emergence of protocols that place greater emphasis on decentralized principles, such as Reflexer, a stablecoin protocol that is not pegged to the US dollar and has an independent price formation system. These protocols will complement those that introduce centralized elements, creating a balance in the DeFi ecosystem.
We can look forward to a more mature and efficient financial system, and we can also wait and see how blockchain finance represented by "DeFi" will change and be defined in the future.
