2023
2023 is starting hot, Defi narratives are reforming. Let’s see what’s cooking up.
LSD, Liquid Staking Derivatives, Love, Sex, Dream
Staking as much ETH as possible is the main goal of 2023. We must avoid building monopolies while doing so. We need as many people as possible running validators in order to make Ethereum the most decentralized and robust layer possible.
But that's not all, we need to stop using unstaked ETH in Defi. It’s counter-intuitive and inefficient if staking and withdrawals solutions are safe and battle-tested. LSD should eventually replace WETH and ETH but there are too many LSD versions circulating at the moment.
This brings me to the next hot topic of 2023, tackling fragmented liquidity.
LSD is a great tool for doing a lot of things, fragmenting liquidity is a negative externality of it. The LSD war brings a lot of competition, strong incentives and many options for the user. It's positive in perspective, but it's not the basis on which we want to start so that staked ETH becomes the base currency of Decentralized Finance.
Frax to save them all ?
Luckily, we might have a savior to unify all staked ETH liquidity. Frax with frxETH & sfrxETH are here to take it all. But as always, they are happy to share the glory as they have a mountain to climb.
It’s in their obvious interest to make frxETH the base currency of Defi as Frax has everything except consistent volumes on their pools. They are still looking for the magic sauce for FRAX. What is expected to generate the most DEX volumes in 2023? Incentivized pools for Liquid Staking Derivatives. FrxETH might be the missing secret ingredient.
Frax already has the recipe for making a base pool. They’ll create a frxETH/USDC/FRAX pool on Curve, heavily incentivize it with all their voting and bribing power, and thus attract massive amount of liquidity. As simple as that. We've seen it work before with the FRAX Base Pool. From now on, I'll call it a classic Frax.
The difference from the FRAX BP scenario is that high demand exist for a staked ETH/USDC pool with a lot of liquidity. Demand for FRAX is not high except for farming, even if new use cases are gaining adoption steadily (Fraxlend). Sentiment had shift a little on USDC, so it makes sense to see the 3pool consistently do higher volumes than the FRAX/USDC pool yet very incentivized.
Different story with a frxETH Base Pool. Firstly, the 3pool was a giant competitor when FRAXBP launched. There isn’t anything like that in the current ETH market. Liquidity isn’t high enough on ETH paired with stables on Curve, the best routing option on large swaps is through the trycrypto pool (170m$ TVL). The consequence is a 2.83% potential price impact on a 1000 ETH swap against UST/USDC. A shame on Curve and a shortfall.
So if the frxETHBP has a superior APY than the frxETH/ETH pool, it will be very competitive (the others LSD can’t have a word here) because the positive difference between yields will provide a compensation against IL. Deeper liquidity will bring higher volumes which should make frxETHBP more profitable than the frxETH/ETH pool.
You should tell me yes, but there is only $115m in ETH and USDT to capture.
You’re right but Curve isn’t the real target here.
Frax targets the highest source of ETH liquidity in Defi, the WETH Uniswap pools. Difficult to fight against the yield generated by managed liquidity on Uni v3 (APY between 5-20%). But there are LPs who distrust liquidity managers and choose wide ranges to mitigate rebalancing and IL, they and the fish are the real targets. If the frxETHBP CRV APR + APY trading fee undoubtedly outperforms the return on WETH/USDC Uni, LPs will be forced to make a choice and a majority of them should switch to Curve eventually. It was impossible for Frax to offer a cocktail as sweet as this to LPs with FRAXBP.
FrxETH takes the influence of Frax to a new level.
It’s important to note that Frax revenue should go up a lot in the future if this takeover happens but it has a cost. A recent proposal disclosed a budget of a maximum amount of 2.4M$ in FXS spent bi-weekly to incentivize all frxETH liquidity. The total bi-weekly bribes budget can reach $10 million in FXS, about $1m was spent in last two rounds.
Nevertheless the growth of frxETH POL ($26m already) will allow Frax to recycle some of the bribes. 8% of the total ETH PoS earnings goes to Frax treasury in the form of frxETH.
Lido pays ≃ $2m/month in LDO to incentivize their LPs on Ethereum. They also try to diversify their incentives with a new version of their referral program. Rocketpool is into Balancer War, rETH/WETH was the top voted pool (17.4%) in the last gauge weight vote on Aura. APY is 14% on a $63m TVL.
All of this is possible because ETH Proof Of Stake brings us a new form of ETH. This new ETH will inevitably be implemented everywhere in Dexes, lending protocols, trading protocols, yield aggregators, everywhere in Defi. Its Home of Trading will be where liquidity, volumes and incentives are highest.
Bootstrapping liquidity with staked ETH for new projects will also be one of the keys to watch. A good point for Frax as new protocols will be strongly incentivized to create their initial liquidity pool with frxETH to benefit from Frax’s CVX voting power.
This “one in ten years” catalyst should determine some winners and the direction for the next chapter in crypto. DEXes competition can take a drastic turn in this environment. Nothing would have changed so fast in the Ethereum landscape without the POS.
Crypto fiction at Frax kingdom
Uniswap does not have the tools to influence the market's decision on the choice of new home of staked ETH liquidity, and I think they may regret that. Curve obtained this power with its emissions program and rewarded the winner of its war with it.
If Frax can set up the frxETH pool before Shanghai withdrawals are enabled, they should win it. This will take time as uniswap LPs are loyal users but after a while it will be hard to say no to their farmer instincts and management cost savings. A new world will begin where frxETH/USDC/FRAX is the home of ETH liquidity. All LSD competitors will be forced to make a choice, die slowly or create their xETH/frxETHBP.
And Lido in all that? Obviously a longer process but same destiny. If they have the right mentality they will collaborate with Frax. It will be a win-win.
This should result in the creation of a stETH/frxETHBP pool with rewards split into CRV, CVX, FXS and LIDO theoretically. Very, very high rewards at stake. Chances are we'll see something like a stETH/rETH/cbETH/frxETHBP pool encouraged by all the major LSD players in the relatively near future. A problem to work around to achieve this is the rebasing function of certains LSD.
Since I’m on the synergies aspect, Synthetix and Frax should work together, atomic swaps are great but just a starter while waiting for a red hot v3 (votes will begin soon). Their products just need more liquidity, they will enter the bribe market to capture it but Frax can help them do it more efficiently.
At this point, Frax should consider dissolving the FRAXBP pool to focus its POL and voting power on the new base pool and frxETH pools. This will help reduce FRAX's reliance on USDC and increase ETH backing. This is one of the best ways to decentralize FRAX while generating more revenue. SfrxETH lending pool on Fraxlend is another effective tool used by Frax that should be adopted by retail.
In 2023, we will observe the Collateral Ratio of FRAX reach 100% imo. At this level of Frax supply, Frax must generate $28m in non-Frax POL to achieve this goal. confidence will increase, usage and volumes should follow. If they succeed, Frax ecosystem should grow exponentially, finally. The only downside for FXS is due to inflation. Let’s see how it plays out.
Now that staked ETH has become the norm, what are we going to do with all that ETH?
Generate more yield and arbitrage
Vaults
Vaults are already a mainstream narrative, Defi users are looking for automated strategies that will take care of rewards auto-compounding while mitigating IL to generate higher returns.
The suite of products launched by Aladdin DAO goes in this direction. Clever to access future yield (clevCVX, clevUSD), Concentrator to offer automated harvested vaults (aCRV, abcCVX, afrxETH and others).
Conic Finance is another awaited product, it will basically be an automated liquidity manager for Curve LPs. The purpose is to have exposure to multiple pools by deposit a single asset to an omnipool. This should definitely be PMF, we all know Curve LPs are mercenary. USDC, DAI and FRAX are the first assets to have supported omnipools and their respective whitelisted pools (e.g for USDC omnipool, FRAXBP, FRAX/3CRV, 3pool and sUSD/3CRV are the whitelisted pools). VlCNC holders vote to choose which omnipool are created, which pools are in them and how much a pool weighs in the omnipool. That’s a lot of power in the hands of vlCNC holders. Probably nothing.
How to not mention the GLP vaults war (thanks Defi_Mochi) who’s ragin (Jones, Rage Trade, Plutus, Umami) ?
My quick take on the GLP war is that the pursuit of Delta neutrality is complicated due to constant small changes in GLP composition based on traders behavior. This makes rebalancing costs high, so I prefer the Jones solution at the moment, a leveraged GLP with in-house permitted lending/borrowing. Users will maximize the gains and the costs of GLP. History tell us that GLP gains outperform losses after one year. For users who truly view GLP as a long-term investment product because they are bullish about decentralized margin trading and GMX’s ability to drive it, applying leverage to GLP can be the most profitable option. As long as they can stomach the losses.
Most of these strategies will attract some TVL as they improve the user experience due to their higher yield, automation and cheapest costs.
All of this will ignite the Second Curve War on Curve and Curve-like DEXes on others chains.
Often the farming strategies require 1:1 pools made up of the “vault version” of the underlying token paired with the underlying token in the strategy to provide an early exit to users. These pools need to be incentivized in order to retain their sticky liquidity and their "peg", and the cheapest way to do this is to pay bribes or stacking CVX and CRV.
The best farming opportunities of the year might reside here, these pools are often low liquidity as their products are niche but the demand, volume and incentives are strong. IL should be low because it is often two different versions of the same asset in the pool. Smells good for farmers.
Additionally, the protocols that execute these strategies need a high APY on their governance token pools to bring visibility to their product, liquidity and demonstrate their strength in the market. In fine every protocol want incentives paid in a token other than their own. It’s wayyy more sustainable and efficient on the long run if your product is PMF. Having a Curve gauge will be a decisive step in a protocol success. Nowadays, a high APY on a liquid Curve pool is the strongest signal you can send to the market.
These protocols must also integrate their vault token into Defi protocols. I am thinking in particular of lending protocols to generate a leveraged yield on yield-bearing assets or borrow stablecoins. This will bring greater composability, but requires isolated lending pools. This is where a protocol like Silo fits in for example.
Account Abstraction
Not gonna lie, abstraction accounts have huge utility potential. Users can retain ownership of a new smart contract that is tied to their wallet without interacting with it. It is like a sub-wallet of their wallet. The smart contract will only execute authorized and programmed operations only. Users can make under-collaterized borrowing (leverage 5x) on stablecoins or ETH/BTC to invest exclusively in protocol-selected strategies. For example, you can deposit 10 ETH, borrow 40 ETH, swap it for BTC, provide liquidity to a stETH pool or swap USDC to CRV for eg. All the assets remain in the smart contract.
So users can leverage a lot of things with it, not just long or short tokens. It's still at the genesis, there are caps and minimum amounts to open an account (100k$ min. balance on Gearbox), moreover strategies must be whitelisted and monitored, the liquidations can be improved but that’s definite progress. Gearbox is the leader in this sector ($117.55 million TVL), Sentiment ($9.8 million) follows on Arbitrum with fewer usage requirements. The success of this type of protocol will be based on the relevance of the integrations and synergies that they manage to achieve.
Security of their contracts is key too. The main advantage of abstract accounts is improved security, the abstract account can be compromised without dragging the wallet down. This can be a solution to the private key issue and really help with wallet adoption.
By the way, I just saw today a project in the NFT space using the same idea to retain user’s ownership of their NFT without exposing the main wallet. In fact, NFT owners delegate the rights and ability of their NFT to a separate wallet. All the delegated datas are stored in a register on-chain. Users can now serenely chase airdrops, sign into token-gated communities, participate in games, rent their NFT rights ect. 4,300 wallets are using it to store more than $400 million so we can say it’s PMF lmao. Good job Delegate Cash.
Accounts Abstraction need to be pushed hard. We are in the good path.
Margin trading, GMX wassup?
Of course, we will degen trade staked ETH. In a decentralized way s’il vous plait.
GMX will introduce a massive upgrade with synthetics. We're still waiting to hear how exactly the system will work. I’m pretty sure that the first successful pools will be based on different versions of staked ETH. GMX will naturally become the home of liquidity for frxETH on Arbitrum. Frax should expand some of their POL and incentives on GMX. A GMX/stable pool should also be created, liquidity should come home. Maybe there is something to dig into on the stablecoin swap side for GMX? Provide delta neutral yield to LPs without GLP. Liquidity on stable swaps in still low on Arbitrum, Curve moves slowly here (only $20m on 2pool).
This next iteration is a must need for GMX who has struggled at times to make liquidity available to trade in 2022 due its immense success. This should quickly scale GMX and attract different types of users through the addition of new pairs. Everything will become more permissionless with synths so GLP can rest a bit.
Especially since Kwenta has a good product and is gaining ground, thanks to perps v2 from Synthetix. GMX can't let them eat market share. Let the battle begin.
2023 should be the year where decentralized margin trading protocols take over centralized platforms in people’s minds (volumes flippening will come later). Improvements made by these protocols are only in the purpose to make the user experience as good as on CEX. They get there fast, the front-running and oracle issues should be fixed in their next version, all accompanied by faster execution. Spreading decentralization’s ethos will do the rest of the job.
OPTIONS
It’s been a long time since I want to talk about Dopex. For me it’s the most innovative protocol in crypto with one of the smartest and dumbest community at the same time. It’s truly magic but you won’t believe it.
Why is it so good? hmm
They remix the perspective people have on options. Never in my life did I think I would be able to understand how options work properly, to have the ability to take advantage of a narrative or an event by buying an option. All this is possible thanks to the genius attribute ELI5 of the Dopex team. In terms of product and explanation.
So what they are cooking up?
SSOV. When it came out I was impressed with the simplicity of the product, you can easily buy an option at a define strike price, and provide liquidity even more easily. A big plus is the calculator which helps you understand what you are doing. All this is just the representation of the classic trad-fi options product at the Dopex sauce.
More, more and more new SSOV with different bluechips tokens and calls and puts available on all of them would great. I have no doubt that we will have them. Liquidity remains the main problem. Often it is not available at all SSOV strike prices. LPs want to protect themselves from getting slashed if they finish the epoch OTM. But it really pays off for LPs when utilisation is high and they’re ITM. The solution with the RPDX rebates was perfect for LPs, not for the rDPX inflation. In rDPX v2, the new rebate system looks promising. Rebates will only be cash out if used to mint dpxETH and will expire if not used. Clever.
Things accelerated when Atlantics Puts materialized and finally launched. This opens up endless options for Dopex and brings true blockchain innovation. I mean without blockchain, Atlantics wouldn’t have been possible. So now you can buy a put and play with the collateral that represent the option value you bought. Borrowing through Atlantics is limited to Dopex whitelisted contracts, similar to how an abstract account works. We going to see many interesting use cases, composability has been unleashed.
So Dopex launched Long Straddles, it takes advantages of Atlantics put to be long and short on x token at the same time. You buy a put option and the underlying straddle token with 50% of the value of the option you bought. It’s a bet on the volatility on a predefined epoch (3 days currently). Straddles writers wins if volatility stays in a defined range but they need to edge the downside if the price falls below their strike price but stays in the range. It’s a precious tool when you know something is going to happen very soon but you don’t know what will happen. A classic in crypto. Straddles are a good feature for Dopex degen casino.
Next, Dopex introduced Options Liquidity Pools. Basically, you deposit your collateral to buy options at a fixed strike price and at a discount you choose. On the other side, option buyers can sell their options at any time with an exit fee which is the discount offered by the liquidity providers. This brings recycling liquidity, composability, and will drive more volumes to the platform.
It was the missing piece of SSOV, with that the product is really more complete. Of course, liquidity need to be constant but it’s an ongoing process. The better product very often wins if it survives long enough.
Now the cerise on the cake, the horcrux that the Degens dreamed of, Insured Long Perps. Yesir, you can now be degen long without getting liquidated. Insane by the Dopex team. For real.
It’s not like you won’t be wrong and lose money, but you won’t lose all your money in a sadistic liquidation.
Let’s dig in.
You buy a put option at a fixed strike when you open your long position on GMX, the put option strike price is automatically chosen to be a few ticks above your liquidation price. If your position ends up in the liquidation zone, the insurance will be activated and transfer the profit from your put option to add collateral to your position. Your liquidation price will be reduced to a price where you can’t be liquidated (close to 0), and your leverage to 0. This is all automated, you have nothing to do except open a leveraged long as per usual. Yes young degen, you will survive another day. After that, you need to close your position and reopen it obviously.
Real crypto magic in action right here. Again this requires liquidity to allow degen traders to buy the weekly puts options, but some things have been arranged to incentivize LPs (max strike price, funding rate, premium, rewards, automated rollover). For liquidity on GMX, it's all up to them, so for now the product may be unavailable at times when liquidity usage is at its max on GMX. But the more GLP and GMX grow, the more space there will be for this strategy.
For example, to open a 1000$ long on ETH at x10 leverage it cost you 1068$ or 6.8%. 1% goes to GMX, 3.3% to the puts liquidity providers, and the rest to Dopex treasury. Very competitive and synergistic.
Moreover, it’s the first product that can bring real revenue to Dopex thanks to the strategy fee. The fee is 0.5% of the collateral position at a 2x minimum leverage and increase proportionally to the leverage to a 2.5% maximum at a max leverage 10x.
Dopex ft. GMX. We want so more.
But we won’t for now because Dopex want to build an options perp protocol. Ballsy but a challenge worthy of their talent.
Let’s not forget, dpxETH is right around the corner (testnet this month hopefully). It’s really “up only” tokenomics for rDPX in its new version as long as the Dopex treasury has enough voting power on Curve/Convex. They have $1.25m in CRV so they can see it coming.
The backstops of dpxETH looks promising, the perpetual put pool should be very capital efficient and provides a way to control dpxETH supply. Incentives to bond should be high thanks to the discount and dpxETH farming. 1k veDPX holders will have exclusive rights to arb dpxETH when < 0.99 ETH (hello Plutus & whales). But dig yourself, the whitepaper is here.
Dopex is set up to gain massive traction this year if it finds suitable market makers for its entire product line. Options are a complex product for retail and a tricky degen tool to use because when you buy an option you can lose all your stake at the end of the epoch if you if you get it wrong. So you can only go wrong for a short time and especially not at the end. We aren’t used to that in crypto. When buy spot, you can be wrong for a long time without losing everything because your coin can have multiples life cycles. We aren’t used to that in crypto.
I think options need more mature investors than the current state of crypto where long-term hodling is one of the tenets. But the narrative will catch up as options are the natural next step in increasing capital efficiency, and the ultimate degen casino product, but crypto degens don't know it yet.
For the moment, Dopex users have to buy options without realizing it. Atlantics has everything to make that happen, insured long perps will produce a lot of disguised puts buying volume, dpxETH should also.
Any products built on top of Dopex will help in this regard, we saw this already with Jones metavaults. Jones provide trading liquidity on DPX and RDPX pools with users deposits. These only indicate if they are bullish or bearish on the token, then the strategy will utilized part of their deposit to buy weekly calls or puts options on the underlying token to maximise the yield of the vault. Perhaps Dopex should create automated in-house strategies for users.
Whatever happens, Dopex will hardly push the OpFi narrative this year because many innovations are planned, the Mastermind TzTok-Chad explained them well in this article. Market makers should not remain insensitive to such charm for long.
It’s all for now, there are others things that I would like to talk about in depth, like how protocols will try to better align sticky users and token utility. Finding new users is hard in this competitive market, protocols better incentivize their current loyal users to hodl and use their governance token through the use of their products. Synthetix v3 and Radiant v2, Link staking, fees discount and privileges to veDPX holders are the examples that come to my mind.
Other things worth mentioning pêle-mêle are the cross-chain world, GammaSwap and the fight against IL, Connext Amarok, Circle Cross-Chain Transfer Protocol, crvUSD, Arbitrum to rescue optimistic rollups, zkRollups, Silo, news tweaks of the vote-escrowed model by new DEXes...
There’s a lot of innovation that coming, 2023 should be pretty exciting.
Thanks to all meme and analysis creators. Y’all are making the ecosystem better.
Founders please keep it real and surprise us this year, you’ll be rewarded. Global degeneracy is at peak level.
Thanks for your time if you made it this far.
NFA, DYOR.
Daesu