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By Bryce Cavalli,
Decentralized finance (DeFi), a new investment mechanism, has exploded in the financial field, which is undoubtedly a trend worthy of attention in the digital asset industry.
With billions of dollars in value circulating on public blockchains, it is only a matter of time before digital assets enter the realm of revenue generation through on-chain banking and financial systems.
Different financial products from lending to derivatives have entered the blockchain financial industry, and have been driven by this experimental trend of providing traditional financial instruments to the industry in the past few months. This movement is largely achieved by the Ethereum blockchain, as it provides the interoperability required for Lego blocks of different currencies to interact with each other.
The governance of these new currency agreements has always been a major issue. It introduces the concept of governance tokens, which are usually generated through income agriculture methods.
What is yield agriculture?
The DeFi platform has opened up a series of new ways and business opportunities, and yield agriculture has become the cornerstone concept of DeFi in 2020. The craze started with Compound’s COMP governance token, which was the first to initialize this investment mechanism. On June 15, Compound distributed its governance tokens on the basis of earning the usual cryptocurrency interest. This concept, because it looked very profitable and effective, quickly spread to other applications, creating hype for revenue agriculture and liquid mining.
As a concept, income farming or liquidity mining is a new way for users to earn passive income in the DeFi ecosystem. Cryptocurrency agriculture involves collateralizing crypto assets on a certain platform in exchange for a return on investment. The trusted platform is then responsible for generating profit and returning it to its stakeholders.
The main task is to generate governance or reward tokens for anyone who participates in the implementation of the agreement of the system:
- The liquidity provider deposits funds in the liquidity pool. This reserve provides a market where users can provide or withdraw loans and exchange tokens.
- The use of these platforms involves the payment of commissions (fees) to the liquidity provider based on the liquidity provider’s share in the liquidity pool-in return or interest.
- The interesting part is that in addition to fees, another incentive to add funds to the liquidity pool is the distribution of new tokens-a governance token that grants holders the right to participate in protocol decisions.
The goal of any application is to generate greater liquidity. Therefore, the invested funds are transformed into investment and return generators. Unfortunately, the intensity of production agricultural activities has distorted the value of related crypto assets, where demand is higher. At present, it is still a fragile mechanism, and it involves a lot of risks for investors. The platform may be attacked, and the value of the asset is very unstable, because there are always new agreements appearing to compete with the most promising plans.
Nevertheless, high-yield agriculture is expected to become a glimmer of hope in the DeFi field, expanding the industry and attracting financial capital and new players to enter the field. As DeFi becomes more and more popular, more and more financial service companies hope to embrace blockchain and move from a traditional financial setting to a decentralized ecosystem.
Governance tokens as a differentiating factor for yield agriculture
DeFi is not yet fully decentralized, and many major platforms and projects start from the core team that controls their initial development. With the rapid rise of governance tokens as a means of decentralization, this situation is gradually changing.
Governance tokens have become an important part of DeFi applications. It enables new projects to achieve a higher level of decentralization. Most governance tokens function similar to shareholder voting, allowing investors to influence project development roadmaps and operational decisions.
Recently, governance tokens and income agriculture have discovered synergies through liquidity mining methods, in which governance tokens are distributed to early users to provide liquidity for a given platform. In this way, liquidity mining becomes a way to distribute tokens fairly to platform users.
Despite their popularity, governance tokens also face their own challenges. The main issue involves the concentration of governance tokens in the hands of a limited number of early investors.
A recent report emphasized that many projects, especially those with strong venture capital roots, are still highly concentrated. Analyzing projects such as MakerDAO and Compound, the study found that the voting process seems to be mainly controlled by large holders, because the top 20 addresses hold approximately 24% (MKR) and a staggering 68% (COMP) of the total supply.
It is important to see who owns most tokens and how they are managed. For example, having a multi-signature wallet on core assets and locking in value in a smart contract helps to show that the founder is willing to work on the project for a long time.
In the first governance vote of the leading decentralized exchange Uniswap, an example of a potential problem has been observed. The voting revolved around a proposal designed to reduce the number of tokens required to submit and pass the proposal. It was proposed by the open source lending agreement and the main UNI token holder Dharma.
Although the proposal received overwhelming support from 98% of the votes, it ended in rejection. It is about 1% lower than the threshold of 40 million votes required for approval at the end of the voting. If approved, the entire community may be managed by its two main investors, thereby significantly reducing the effectiveness of its decentralization.
DeFi boom drives demand for stablecoins
Consistent with production agriculture, in the recent DeFi boom, the demand for Ethereum-based stablecoins has surged, the supply of Dai has increased by more than 600%, and the USDC has increased by 200%. Since July, Dai’s market value has been close to 130 million U.S. dollars, and since then its supply has expanded to around 1 billion U.S. dollars.
When Ether holders deposit their ETH into the MakerDAO protocol, Dai is created, allowing them to create stablecoins and use Ether as collateral. As an ERC-20 token, Dai can then use the DeFi protocol on the Ethereum network to generate revenue.
Demand for Circle’s U.S. Dollar Coins (USDC) also exploded in the third quarter. The market value of USDC increased from USD 928 million on July 1 to USD 2.79 billion today. USDC is the second stablecoin that has grown by more than $1 billion in a single quarter after Tether (USDT).
In the third quarter, the combined stablecoin sector’s total capital increased by $8.2 billion, surpassing the sum of the previous four quarters. Of the $20 billion in capital in the industry, 75% has been issued on Ethereum.
In this context, many different DeFi alliances have been established in the past few months. Ren and Polychain Capital launched the Ren alliance in March, and TD Ameritrade and Cumberland DRW announced the Chicago DeFi alliance in April.
The Open DeFi Alliance plans to announce the launch of the Western branch and the addition of eight new member companies. The alliance aims to unite leaders in the DeFi field by forming a global cooperative alliance focusing on innovation, risk management and liquidity strategies.
New members include decentralized finance celebrities Aave, Balancer, BlockScience, DyDx, Ocean Protocol, Outlier Ventures, Quantstamp and SuperRare. The organization now has 16 companies. It now includes four of the 20 largest DeFi agreements with locked capital.
Nyctale is pleased to be indirectly related to this plan through our main investor Outlier Ventures.
source:
- With eight top projects joining the Global DeFi Alliance, East meets West – Cointelegraph; October 27, 2020 [1]
- Production in 2020 within agriculture: what are the trends? – Hacker October 25, 2020 [2]
- Production agriculture drives DAI supply to increase by 623% to nearly $1B – Cointelegraph; October 22, 2020 [3]
- Uniswap’s first governance vote failed…despite 98% support – Cointelegraph; October 20, 2020 [4]
- Everything you need to know about DeFi and yield agriculture-Publish0x; October 16, 2020 [5]
- DeFi governance tokens face three major challenges – Cryptonews; October 11, 2020 [6]
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