In The Week

Developments from Uniswap, Centrifuge, Polkadot, Compound, Terra

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Spotlight 🔎

Uniswap

Just after 11 days from the launch of Uniswap V2, the second iteration is already attracting LP contributions and trading from users.

As discussed in our previous ‘In The Week’, Uniswap has revamped its features to reduce slippage and improve profitability for liquidity providers. Some of these features include flash loans, time-weighted price oracles, and stablecoin pairs. Uniswap V2 has already attracted over $17m in total liquidity and over $13m in trading volume since its launch.

The Formally Verified Take

The transition from Uniswap V1 to V2 had been long anticipated by both LPs and end users who were seeking a less friction heavy experience. The fast growing usage of V2 is therefore not a complete surprise but the rapid adoption of V2 in the last week demonstrates how attractive its new feature set is.

For context, just before the March 12th crash, overall liquidity on Uniswap was ~$53m. Shortly after, liquidity was wiped out falling 52% in just a few hours. Since then, liquidity has been building up in the last 2 months aided by both asset appreciation as well as new LP provisions. As V2 launches, liquidity has been quickly added to the new version which coincided with liquidity has been withdrawn from V1. The net effect now is a continued increase in overall liquidity across the two versions. DEX volume market share for Uniswap (V1+V2) is also maintained throughout the week with Uniswap retaining ~40% share. The transition has been smooth.

Additionally, since the launch we can also measure the usage of one of the most asked for features in V2 - stablecoin pairs. Before V2, a user wanting to exchange USDT for DAI would have to use ETH as an intermediary asset. Now that LPs can provide ERC-20/ERC-20 pairs, this friction (along with slippage and higher fees) is effectively eliminated.

Today there are already 47 DAI pairs, 32 USDC pairs, and 11 USDT pairs. The liquidity from all of stablecoin pairs already make up ~20% of the total liquidity on V2 today. More interestingly, trading stablecoin pairs is growing in popularity already with combined volume across all stablecoin pairs sometimes accounting for more than 40% of total volume on Uniswap V2.

It will be fascinating to see how stablecoin pairs are used in Uniswap in the coming months particularly with the introduction of the Gnosis ring trading DEX and Balancer’s liquidity mining that both aim to maximise liquidity provision.

Quick Takes ⚡️

Centrifuge

Centrifuge releases asset-backed lending dApp Tinlake and their Centrifuge Chain mainnet.

Centrifuge provides a technology framework for bringing real-world assets to DeFi, initially looking to MakerDAO to bolster the DAI debt and thus open market availability. Within this framework, debt securities (e.g. NFTs that represent invoices or real estate) will be priced by an off-chain oracle and have their own unique default risk as collateral in the MakerDAO system. Through their pooled model, the collateral proposed to the MakerDAO community is DROP tokens (see Tinlake’s image below).

The Formally Verified Take

Centrifuge is clearly pushing for a decentralised global credit market through real-world asset securitisation with MakerDAO playing a central role in realising this. Bringing real-world assets to MakerDAO has certain benefits - by being more outward facing, there would be an increase in the theoretical limits of total DAI debt issued while not being dependent on cryptoassets like ETH and synthetic BTC.

But this is where things tricky. Risk in the Maker system is managed through alterations in the collateralisation ratio, stability ratio and liquidation penalty which can fluctuate frequently (as we’ve seen even this year). But with fees being necessarily dynamic, it is possible for the projected income from the underlying loans to fall lower than the stability fee set by the Maker governance. If there is no economic incentive to borrow against the DROP tokens, are they simply dropped or liquidated from system?

There are also open questions as to what the precise legal recourse is to collect the underlying collateral assets if issues are found - collateral assets can quickly become unsecured debt, something MakerDAO has not dealt with using digitally native assets secured on-chain. Should Maker instead explore all cryptoasset collateral avenues like BTC synthetics to attract users to become indebted in the system even if these synthetics have certain tradeoffs themselves? Overall, it will be a while until tokenised securities would actually be added to MakerDAO but if they are, the ‘purist’ DAI vision will be compromised.

Polkadot

Web3 Foundation initiates the launch of Polkadot.

The Polkadot mainnet is live after 3 years of research but the network will be launched in phases to ensure a smooth roll out towards the end goals of having a fully token-controlled relay chain. Polkadot will start out as a centralised POA network but users will be able to claim and stake their tokens DOT tokens. The Foundation and Parity will retain superuser control of the network in rectify critical vulnerabilities in the form of a ‘Sudo’ module. If no issues are found, governance will be enabled where a council and technical committee will eventually discard this Sudo module altogether.

The Formally Verified Take

There are two aspects to the Polkadot mainnet launch to really pay attention to. Firstly, the launch of mainnet clearly sets the stage for Polkadot to prove out its on-chain voting mechanisms like adaptive quorum biasing and lock-vote multiplying in a non-Kusama testnet environment. One of the areas to watch will be the voter engagement compared to other hub-and-spoke networks like Cosmos which adopts a rather different governance structure for its Cosmos Hub.

The Polkadot launch also comes at a time when chain interoperability is currently in vogue from cross-chain asset transfers with RenVM and the long awaited CosmosIBC protocol release. For Polkadot specifically, providing a hub-and-spoke model for developers might be attractive right now - Ethereum is experiencing very high gas prices (it currently costs $38 to start an Aragon DAO) and cost-sensitive chains might opt to have more stable fees through a Polkadot-type model while also being able to interoperate with other chains including Ethereum (i.e. Polkadot-Ethereum bridge).

Compound

Holders of Compound’s token COMP are now responsible for governing the Compound network.

COMP token-holders are now in charge of debating, proposing, and voting on all changes that occur on Compound. Critically, the distribution of COMP will be determined by the “individuals, applications, and institutions” that use the compound network. Specifically, a COMP reservoir will allocate tokens to each Compound market proportional to interest accrued and split between the suppliers and borrowers within.

The Formally Verified Take

The uniqueness of Compound’s governance is seen through its ‘agreement for future governance’ framework. This SAFG model which was touched upon last week ensures the stewarding of the network is only determined by network participants who contribute resources to that network. Instead of simply providing a widely accessible governance token that passive holders don’t utilise, this approach will give active participants the guaranteed rights to vote in how the network evolves.

Similar to Futureswap’s SAFG approach, we should see an increased incentive to participate in any governance events due to skin in the game dynamic and other networks (e.g. Kyber’s Katalyst upgrade) might end up engineering a similar governance structure for the same reasons.

Terra

Terra integrates CosmWasm to provide smart contract functionality to its blockchain payment network.

Terra’s payment network is built on Tendermint, the technology underpinning Cosmos and is supported by a wide range of stablecoins pegged to major fiat currencies. CosmWasm simply provides a WebAssembly virtual machine for the Cosmos SDK. With such an integration, applications can be built in the Terra ecosystem that can use several smart contracts running on multiple chains via Cosmos’ IBC protocol.

The Formally Verified Take

To give some colour on the above, Cosmos just held a pivotal vote that would fund the development of CosmWasm smart contracts that can be used by the Cosmos Hub in its next upgrade. The vote itself had a high voter turnout of 72% with an overwhelming majority that voted in favour (99.9%). CosmWasm is clearly a highly desired by the community.

Really, the Terra news speaks to the strong aspiration in bringing more sophisticated applications to the Cosmos ecosystem. In this particular case, being able to build staking derivatives around Terra’s mining asset LUNA where the necessary smart contract functionality will be enabled by CosmWasm. But it helps to also look at the bigger picture here. The real value proposition for Cosmos will be the composability between applications built on independent tendermint chains that are interconnected through Cosmos Hubs. All of this can only be done with the arrival of IBC. Once live, it will no doubt play a crucial role in guiding Cosmos’ long term success.


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