Stablecoin Lending Declines, Hop Protocol, DAO Banking

JUN 29, 2022 • 6 Min Read

Amey Dandawate + 2 others

Disclosure: Members of our team hold AAVE, GMX, USDC, HOP, and LFNTY. These statements are intended to disclose any conflict of interest and should not be misconstrued as a recommendation to purchase any token. This content is for informational purposes only and you should not make decisions based solely on it. This is not investment advice.

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Chart of The Day: Stablecoin Lending Rates for the Previous Quarter

  • Stablecoin lenders on Aave and Compound saw their yields drop from 2.4-3.7% to 0.8-2.3% since the beginning of this quarter.
  • Alongside yields, the TVL of these stablecoin money markets has also declined. The collective TVL for all markets listed in the chart above has declined by 55%, from $9.6 billion to $4.2 billion, currently.
  • Traders primarily use lending and borrowing platforms in DeFi to borrow stablecoins against crypto asset holdings. The decline in stablecoin lending returns, alongside TVL, may indicate the unwinding of leverage and a decline in liquidity.
  • In general, stablecoin supply has also declined, with circulating supply for DAI and USDT dropping by 33% and 18%, respectively, since the beginning of the quarter.
  • On the other hand, USDC’s circulating supply has increased by 7%, as investors deem it “safer” than Tether. Notably, USDC money markets have also seen the largest decline in lending rates as it captures a higher portion of the stablecoin pie.
  • For more on stablecoins, you can read a previous Delphi Daily report here.

Bridge Fees, Boosted Yield, Stablecoin Pools & Weekly Airdrops

[Excerpt from a Delphi Insights Report]

  • Hop Protocol is a scalable rollup-to-rollup general token bridge. It allows users to send tokens from one rollup to another almost immediately without having to wait for the rollup’s challenge period. This is done by creating a special intermediary asset called an hToken that can be quickly and economically moved from one network to the next and using AMMs to swap between the hTokens and their corresponding assets on each network. Learn more about it here.
  • Yield calculations can be found here. To access Ethereum, you’ll need to configure your MetaMask to run Ethereum’s Mainnet.
  • Bridge: You can deposit and withdraw assets onto Ethereum using:
  • Tokenomics:
    • Total Supply: 1B HOP
    • 60.5% (605M HOP) is in control by the Hop DAO treasury which can turn on liquidity mining incentives
    • 8% (80M HOP) has been airdropped to early network participants

  • Notable Unlocks:
    • 22.45% (224.5M HOP) of the total supply will be vested over a 3-year period after a 1-year cliff by the Development Team
    • 2.8% (28M HOP) of the total supply is reserved for Future Team Members
    • 6.25% (62.5M HOP) of the total supply is vested over a 3-year period after a 1-year cliff by Investors
  • What are hTokens? (i.e. hETH, hUSDC, hDAI, etc)
    • “h” tokens are a cross-network bridge token that is transferred from rollup-to-rollup and are claimed on the layer-1 for the underlying asset. It is an intermediary bridge token that allows trustless swaps
    • The user doesn’t need to deal with “h” tokens directly. Users only deal with the rollup’s native token.
  • Hop Token Peg: How do Hop tokens hold pegs with their native counterpart?
    • All Hop tokens minted on an L2 network are collateralized 1:1. The collateral is locked in the Hop bridge contract on L1/Ethereum
      • For example, 1 hUSDC means 1 USDC is locked in the Bridge Contract on Ethereum mainnet. You can always redeem your 1hUSDC at a 1:1 ratio in the convert section.
  • Providing Liquidity:
    • On each scaling solution, there is a StableSwap AMM to create a market between the token being bridged (e.g., USDC) and its corresponding bridge token called an “hToken” (e.g., hUSDC). Liquidity providers will earn trading fees (0.04% of all swaps) as users transfer funds using Hop.
  • Providing Liquidity in Equal Weights:
    • You do not need to provide both tokens. However, if you do Hop may ask you to provide in unequal ratios. This is because Hop does not use AMMs that utilize the constant product formula like Uniswap V2 or Sushiswap.
    • You should not face any impermanent loss. Even if you withdraw the tokens at a different ratio when you deposited, you will still hold the same dollar value since 1hUSDC = 1 USDC
    • Your deposit may not reflect the LP tokens received. The LP tokens reflect your relative ownership of the pool and are not meant to reflect the 1:1 amount of tokens deposited.
  • For more information, Delphi members can see the full Delphi Insights Report here.

DAO Banking: Beyond Tokens

[Excerpt from a Delphi Pro Report]

  • Since DeFi started taking off in 2020 it has predominately been financed and incentivized through tokens. Tokens have flipped the network bootstrapping problem on its head; a traditional network faces a challenge getting users in early days and relies on word of mouth, tokens incentivize early adoption by offering financial upside. This allows a network to attract capital and scale up much faster than traditional counterparts.

  • However, this is usually not organic adoption. As we’ve seen time and again, protocols can go through a period of a false sense of product-market fit due to their token incentives, only to watch their users and TVL go through a death spiral as their token price falls.
  • The financing of this activity also uses a rather basic capital formation structure, using purely tokens (similar to equity) to facilitate activity, and in many cases, just rent it. Very little has been done so far to incorporate debt or more exotic products like options to finance DAO activities, putting immense pressure on the token as it is the only form of financing available to pay contributors and incentivize capital/users.
  • Since DAO’s are early stage and mostly pre-profit, their treasuries are also heavily concentrated in their native tokens, making the health of the protocol more volatile and less likely to be able to weather longer downturns like the bear market we are in now.

  • Instead of just paying for users by giving out tokens, there are different ways DAOs can finance activities, although the strategy employed depends on what the funds are for. Is the DAO looking to diversify assets away from just their own token, pay DAO contributor salaries, or fund (and bootstrap) a new product? All of these would require a different service/product.
  • For more information, Delphi members can see the full Delphi Pro Report here.

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Amey Dandawate + 2 others