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The DEX Brief No. 13

Where's all the capital in long tail tokens coming from? The markets may finally be giving us a clue + Shipyard's new derivatives DEX is just around the corner!

Written by

Mark Lurie

Published on

October 6, 2022

Top of Mind at Shipyard:

TradFi users often ask where all the capital in long tail tokens is coming from. It’s a difficult question to answer, but the markets may finally be giving us a clue. Currently, yields on U.S. Treasury bonds are around 4%. That's substantially higher than rates offered by decentralized lending protocol Compound (currently ~0.73% to lend and ~2.24% to borrow USDC), yet there is roughly $2B in Compound stablecoin pools. Similarly, Aave has ~$2B and there’s another $1B in Curve’s DAI-USDC-USDT pool, which offers APYs under 1%. That means several billion dollars is sitting in crypto pools, foregoing the higher yield it could be earning in T-bonds, in order to avoid fiat. 

The question is: why? Perhaps many people don’t have access to the U.S. treasury markets. Well, that may be true, but rates typically flow through so that there is some real-world asset that $5B+ sitting in crypto pools could have gone into. Maybe that money belongs to people who were early in crypto and became wealthy from BTC and ETH, but don’t have a functional off-ramp in their country or are concerned off-ramping may tip off tax authorities to unreported gains. Perhaps, it is inertia and many people need a higher yield differential to motivate change or are simply not paying attention. It’s difficult to know what the true reasons are. 

Regardless of the reasons, this is a good time to observe the capital that’s permanently in crypto. A lot of crypto capital clearly has no way to diversify out of crypto, which probably accounts for much of its rotation into long tail digital assets for diversification. This enables portfolio theory to provide a rational basis for many of the mysterious and questionable valuations we see in crypto in periods past (and likely future). This also provides a long-term market for DeFi, regardless of what happens in CeFi. 

Shipyard Insights: 

Shipyard’s derivatives DEX, Longship, is just around the corner! Check out the teaser video and follow Longship on Twitter for the latest info and launch updates. 

  • The DCCPA Proposes a Better Way to Regulate Crypto: Last month, The White House released its first-ever framework for responsible development and oversight of digital assets. Among the proposed bills, we believe the Digital Commodities Consumer Protection Act (DCCPA) takes the most practical approach to oversight and will support sustained crypto innovation in the U.S. 
  • Crypto Derivatives Explained: In this episode of WTF, Crypto, Barney Mannerings of Vega Protocol discusses why derivatives are so heavily traded in TradFi, what’s currently holding crypto derivatives back, and why they are essential to the future of DeFi.

DEX Headlines That Caught our Attention:

What We're Reading:

If you’ve ever wondered about the case for dynamic fee policy versus static fee tiers for AMM liquidity pools, this article does a thorough job of unpacking it. The first in a series of posts on the topic, it dives into why dynamic fees enable liquidity providers to realize larger and more consistent profits, and how dynamic rates can be implemented in DEXs. If you like this article, the next three in the series are already up, with more to come.   

Clipper Updates: 

  • Clipper is Testing a New Bot Ban Feature: A recent increase in trading bot activity on Clipper has been negatively impacting LP yields. To combat this, the Clipper team is currently testing a new “bot ban” feature, which aims to protect both traders and liquidity providers. See the blog post for important info regarding how this affects Clipper users. 
  • NYC Odyssea Party was a Success! We had a blast hanging out with everyone–over 350 attendees joined us IRL and 250+ community members tuned in virtually via live stream. Check out the recap for highlights, pictures, and some alpha on Shipyard’s upcoming derivatives DEX, Longship. 

Written by

Mark Lurie

Published on

October 6, 2022

January 31, 2024

Breaking down the forms of MEV that most affect DEX LPs and traders.

January 8, 2024

Shipyard LP Report results, 2024 outlook for derivatives DEXs, and more.

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