MakerDAO NewChain opts for Solana, Aave's GHO struggles to keep the peg, IPOR releases v2 roadmap, RiskDAO publishes risk report on RWAs,...
Issue #50 of The State of DeFi Lending newsletter
Welcome to issue #50 of The State of DeFi Lending, a newsletter covering the highlights of lending markets in DeFi.
In this issue we cover:
MakerDAO’s NewChain could be a Solana chain as Rune Christensen advances the Endgame discussion. Choosing the Solana codebase for the new app chain has caused a fair amount of public debate and also led Vitalik Buterin to rage-sell MKR token.
Since its launch in July, Aave’s overcollateralized stablecoin GHO has struggled to hold the USD-peg. Currently trading at $0.972, the community is working hard to improve the profile of GHO and reinstall the USD-peg.
IPOR releases the roadmap towards v2 of the protocol. There will be technical upgrades and an expansion to new products. IPOR v2 will be focused on major DeFi themes like LSDs, liquid fixed rates, RWA yield bridging and low-risk yields.
RiskDAO publishes a report that examines the risk factors of Backed Finance’s bHIGH product (a tokenized high yield bond fund managed by BlackRock). Recent RWA defaults have caused intense debate within the DeFi community providing a better understanding of what sort of RWAs are suitable for tokenization.
Read below for more…
News
MakerDAO's Rune explores Solana's codebase for its NewChain and triggers intense community debate.
NewChain is part of the protocol's "Endgame" strategy to enhance its governance and ensure sustainability.
Initiated in May 2022, the Endgame plan comprises five phases aimed at refining MakerDAO's governance structure and its journey towards autonomy. The last stage, Phase 5, introduces a novel chain, termed "NewChain", envisioned as a central hub for MakerDAO's backend operations.
Rune Christensen has highlighted the importance of NewChain in allowing the ecosystem to recover gracefully from severe governance attacks or technical failures via hard forks.
Rune believes that after evaluating various platforms, Solana's stack emerges as the frontrunner. He credits Solana's code for its well-engineered design, reflecting insights drawn from previous blockchain challenges and bottlenecks.
Furthermore, if the MakerDAO community supports this, Christensen envisions a mutually beneficial relationship between MakerDAO and the Solana community. This could manifest in the form of an independent client or funding avenues for the Solana ecosystem. For seamless integration, Christensen suggests the establishment of a "Two-Stage Gravity Bridge" from NewChain to both Solana and Ethereum, fostering a synergistic multichain economy.
The only other potential platform for Maker's new app chain, according to Christensen, is the Cosmos SDK. However, he points out that Cosmos lacks the efficiency of Solana, making it potentially costlier in the long run. Moreover, unlike Solana, Cosmos doesn't have a robust central foundation, which can be viewed both positively and negatively.
Christensen's proposal to leverage Solana's codebase for Maker's appchain has stirred up various opinions. While the Solana community advocates for its platform, others from the Ethereum ecosystem question the choice, and suggestions ranging from EVM to SVM rollups have surfaced.
On September 2nd, Vitalik’s address (Vb 2) sold 500 MKR for 350 ETH through CoWswap. This was the first time in two years that this address had sold MKR and is considered a sign of disapproval.
Aave has resumed minting of its GHO stablecoin, after a technical problem had been resolved. However, the larger issue remains: GHO continues to trade at a discount to USD with no apparent solution in sight. It’s current sitting at $0.972.
Aave launched its overcollateralised stablecoin, GHO, on July 15th which saw an encouraging growth spurt in its early weeks, reaching an impressive supply of ~$24m.
Despite this early growth, GHO has consistently traded below its peg. A combination of factors, including its below-market interest rate of 1.5%, limited integrations, and absence of liquidity incentives, seems to be behind this deviation.
Aave is gearing up to address the situation: The community is discussing the introduction of the GHO PSM (Peg Stability Module) and two other major proposals:
1. An increase in the GHO borrow rates by 100bps to 2.5%
2. Introducing wGHO as collateral, opening avenues for arbitrage and leveraged positions when GHO's value is low.
To reinforce its peg, Aave might also tap into the traditional playbook of incentivizing liquidity on Curve.
Looming on the horizon is the impending onboarding of sDAI as collateral. With a differential in rates between sDAI and GHO, this could add further pressure on GHO's peg. Moreover, those looking to exploit the sDAI-GHO carry trade might find their anticipated yields diminish if GHO manages to restore its peg after they set up the trade.
The heart of the issue for GHO appears to be an imbalance in demand and supply: Many borrowers of GHO aren't settling their debts, keeping the supply high and subsequently dragging the price down.
With Aave not having direct control over the stablecoin's supply and an interest rate that does not correspond to market conditions, stabilizing GHO will become a big community effort and poses a real problem to the otherwise solid track record of Aave.
IPOR released a comprehensive protocol update which expands key features. IPOR is a protocol for “interest rate derivatives” and the planned improvements are likely to find their way through DeFi and lending markets.
IPOR’s v1 launched with a simple purpose: Introduce credit market fundamentals such as IPOR benchmarks and swaps. It turns out these tools and their underlying technology were too complicated and need simplification for wider adoption.
IPOR v2 will address these issues through a rolling release. The first change will be the upgrade of the derivatives engine, expanding to new products. The primary focus of v2 is on major DeFi themes like LSDs, liquid fixed rates, LP token leverage, RWA bridging and low-risk yields.
Notable features of v2 are a revamped infrastructure with new term structures, risk oracles, and improved AMM spread calculations. ETH staking swaps will be introduced: Users will be able to swap fixed and floating ETH staking rates. Another major feature is the DeFi-TradFi yield bridge that enables assets to transition smoothly between TradFi and DeFi for optimal yields.
With the new architecture and product offerings, IPOR hopes to become the foundation for structured DeFi products, which also includes fixed rate lending.
In summary, IPOR’s transition from v1 to v2 indicates a promising trajectory for the protocol: By addressing previous challenges, focusing on usability, and integrating key features, IPOR is setting the stage for a more connected, efficient, and user-friendly DeFi primitive.
Do not forget to check out our interview with IPOR co-founder Darren Camas.
RiskDAO published a new report evaluating Backed Finance’s bHIGH product, which is a tokenized high-yield bond fund managed by BlackRock.
The report describes in detail the risks of the underlying ETF, the issuing process and associated risks as well as the smart contract risks. The full report can be found here.
Risk analysis for RWAs has become increasingly important ever since the first defaults occurred. MakerDAO has recently suffered defaults in its RWA portfolio which is leading to increasing levels of understanding on what RWAs qualify for tokenization.
Quite rightly, some commentators and analysts point out that crypto RWAs should not add more layers of risk that go beyond custodial risks. Most business or consumer loans require stringent underwriting by companies with local knowledge.
RWAs are here to stay, especially as DeFi is looking for its product-market fit and revenue sources. It’s essential for market participants to educate themselves on the various risk factors and there is a growing library of risk reports.