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The DEX Brief No. 17

Higher interest rates are coming to DeFi + more

Written by

Mark Lurie

Published on

February 21, 2023

Top of Mind at Shipyard

A sea of change is coming to DeFi in the form of higher interest rates. Today, Compound money market Earn APRs are 1.74% on USDC and 0.06% on ETH. Within a few months, this will likely shift. Projects like Ondo Finance are bringing U.S. Treasuries on-chain with a 5% yield and the Shanghai Ethereum fork in March will make Ethereum PoS liquid, increasing the risk-free base rate for ETH to something similar to the current ~5% Lido APR.

In other words, the cost of capital is about to rise dramatically and many DeFi protocols won’t be able to cover their costs. Who is most vulnerable? The answer may surprise you: Uniswap. With roughly 75% of all trade volume, Uniswap dominates DEX volumes. However, look closer and you’ll see that 70% of Uniswap’s volume is between ETH and USD stablecoins. Uniswap LPs are already losing money when factoring in impermanent loss – Uni V3 LPs have lost $115m over the last several months alone. Because Uniswap relies on arbitrageurs to keep prices in balance, roughly 50% of Uniswap’s flow is toxic, meaning traders receive more than they put in on 50% of trades. 

As interest rates rise, expect liquidity flight from Uniswap’s ETH-USD pools. When it does, prices will worsen, leading to lower volumes and subsequently lower yields in a negative spiral. The crash in market prices exposed vulnerable CeFi exchanges and lenders. The rise of on-chain interest rates may be what exposes vulnerable DeFi protocols.

Insights From the Team

  • Sweeping Crypto Regulation? First Update the Bank Secrecy Act: Worried that the collapses across the crypto space we witnessed last year will soon spur widespread regulations? Don’t hold your breath. As Mark explains in this op-ed for Coindesk, regulators will first need to either update or unravel existing legislation (namely the BSA) for this to be feasible. 
  • Web3 Needs a UX Revolution Before We Start the Party: “There’s an insider culture within this space that makes complexity enticing to builders and designers; It makes community members feel apt for being part of a small group that understands these topics. It’s this mindset that will always hold back mass adoption.” - Shipyard Design Lead, Drew Tozer, on the biggest barriers to mass adoption of Web3. 

DEX Headlines That Caught our Attention

  • Decentralized gaming ecosystem Treasure announces MagicSwap v2 – the first AMM to support pools for both ERC-20 tokens and NFTs through a single router. This enables trading of all items within a game economy without the need for outside trading platforms. 
  • Crypto research firm Vest Labs announces Vest Exchange, a perpetual futures DEX on Arbitrum that enables users to propose and trade almost any asset, with a focus on unlocking new illiquid and long-tail markets. 
  • DeFiLlama launches new Meta-DEX Aggregator. Available on 22 chains, this aggregator of DEX aggs queries multiple aggregators for both quote and gas prices to provide users with the best trade route.  

What We're Reading

The performance and costs versus security and interoperability tradeoffs for CEXs versus DEXs is no new debate. As the space continues to scale, solutions are beginning to surface. This article discusses a new model for crypto exchanges that could pose answers: the fully encrypted exchange (FEX). FEXs use secure enclaves and the third-party Attestor Network to decentralize custody of user funds and ensure both exchange integrity and trade confidentiality. Definitely an interesting read. 

What’s New at Shipyard

Clipper 

The DEX built to give self-made crypto traders the best possible prices on small trades

  • Behold! Clipper’s OP Token Distribution Plan: Wondering about the mechanics of the OP grant distribution and how it went? This post explains the eligibility requirements and gives an update on the distribution. Good news if you missed this one–there will be a second round, so be on the lookout! 
  • Adventure 3 Recap: Clipper’s third Adventure was a success! 29,000 DeFi pirates from across the seven seas came together for some friendly competition and to build a home together–Clippertopia! Check out the post for all the details. 

WTF, Crypto 

A Shipyard Software Production, hosted by CEO Mark Lurie

  • The WTF, Crypto podcast took a break in January to gather new content. Regualrly scheduled bi-weekly episodes will resume on February 22nd–check back here

Written by

Mark Lurie

Published on

February 21, 2023

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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