ON–199: Lending Protocols 🏦

Coverage on Compound, Liquity, Morpho, Gearbox & Aave.

Jan 12, 2024

ON–199: Lending Protocols 🏦

About the Editor: Spencer Noon is an independent angel investor. Looking to get in touch? DM him on Telegram or reply to this email and say hi πŸ‘‹

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Lending Protocols 🏦

β‘  Liquity ⛓️

πŸ“ˆ 1000 days since launch: LUSD and LQTY holders reach all-time highs, peg returns to $1, borrowing hits Starknet

  • In 1000 days since Liquity's launch, LUSD and LQTY holders have reached all-time highs of 13,575 and 8,353 respectively as DAOs like RocketPool and Gearbox diversified their treasuries into the stablecoin. In recent months, the LUSD peg has been slightly below $1, causing few redemptions. However, LQTY stakers benefit as they receive the protocol revenue that Liquity generates through rewards in ETH (redemptions) and LUSD (borrow issuance fees). LQTY APR averaged over 10% in the last month.
Source: Dune Analytics - @Liquity
  • December saw the first native borrowing integration for Liquity on Starknet. Users can now borrow LUSD on Starknet with no minimum loans, pay Layer 2 gas fees, and provide liquidity for LUSD across DEXs. LUSD is on six different chains with Optimism and Arbitrum leading with a combined $5m TVL.
Source: nimbora.io; Dune Analytics - @steakhouse
  • Redemptions caused the average collateral ratio of troves to increase, but also led to resilience in LUSD's peg. Thanks to redemptions and big trades into LUSD (for debt repayment), the token is above $1. The lowest collateralized troves also improved with positions now at a collateral ratio below 150%.
Source: Dune Analytics - @kyoronut; liquity.defiexplorer.com
  • πŸ’¦πŸ”¬ Tx-Level Alpha: The LUSD peg going below $1 led to a large number of redemptions, resulting in a less than optimal borrowing experience for users. The markets had a brief pullback on Jan. 5 and a whale paid back ~$20M of their LUSD. They used aggregators to market buy LUSD with size (in $5M clips) which helped restore the LUSD peg back over $1. With LUSD back over $1, redemptions became unprofitable. That has had a clear impact with the lowest collateralized troves dropping to under 150% from over 250%.

β‘‘ Morpho πŸ¦‹

πŸ‘₯ peyha | Website | Dashboard

πŸ“ˆ Morpho Blue exceeds $1.5B+ deposits, $900M+ borrowed

  • Morpho is a lending protocol aiming at implementing efficient lending markets on the Ethereum Virtual Machine (EVM). It recently reached 1.5B$ in deposited value and 900M$ in borrowed value across its iterations.
Source: analytics.morpho.org
  • Optimizers are built on top of prominent lending pools. Users benefit from the liquidity of these pools and improved rates through peer-to-peer matching. To date, the Aave V2 Optimizer has $680M in deposited with about $280M matched peer-to-peer. Users can see their rates enhanced by as much as 1%.
Source: analytics.morpho.org
  • Morpho Blue is the new version of the lending protocol. It is built to be immutable, primitive and to allow permissionless risk management by design. One day after its launch on January 10th, more than $15M has been deposited into the protocol.
Source: Dune Analytics - @morpho
  • πŸ’¦πŸ”¬ Tx-Level Alpha: More than 100M$ being deposited into the Morpho Aave-V2 optimizer.

β‘’ Compound πŸ“Š

πŸ“ˆ Compound III grows to over $1.75B in total assets and $500M in borrows across all markets, surpassing Compound V2

  • Since launching its first market, USDC on Ethereum mainnet in August 2022, Compound III has since deployed a total of 7 markets across 4 chains (Ethereum, Polygon, Base, and Arbitrum). Compound III flipped Compound V2 in early December, as governance continues to execute its V2 deprecation strategy, which has steadily reduced collateral factors and COMP distributions.
Souce: Gauntlet
  • Net Earn APY spiked to 15% for USDC on Ethereum V3, reaching market utilization at 95%. A recently passed proposal increased the base APRs at the kink, raising APRs from 3.16% to 4.10% for Earn, and from 4.46% to 6.0% for Borrow. Rates increase drastically when utilization exceeds its kink at 93%, with the proposal also increasing the interest rate slope past the kink by more than 2x.
Source: DefiLlama
  • On the USDC | Ethereum Compound V3 market, borrowing increased 22%, from $313M to $384M, over the past 90 days. In the same period, total collateral supplied increased by 57% ($601M to $944M), while the total borrowable USDC only increasing by 18% ($341M to $403M).
Source: Gauntlet

πŸ’¦πŸ”¬ Tx-Level Alpha: Over $2.13M of collateral was liquidated on Jan 2nd 2024, repaying $2.01M in debt and $117K generated in reserves for the Protocol. The single largest liquidation was $989K in WETH for a USDC | Ethereum V3 borrow. The borrower levered up on ETH recursively within Compound, and was liquidated when the price of ETH fell close to 10% on January 2nd.

Liquidations functioned as designed, with no negative impact to the health of Compound markets.

β‘£ Gearbox Protocol βš™οΈ

πŸ‘₯ Gearbox | Website | Dashboard

πŸ“ˆ Gearbox's PURE Margin Trading crosses $5M+ in open trade value during alpha testing

  • Gearbox PURE Margin Trading enables users to leverage trade on DEXs like Uniswap, Curve and more. This provides users an alternative to perpetuals because liquidity is derived through real, spot assets on DEXs instead of having to trade against LPs. This DEX liquidity has constantly been above $10M on majors in a 2% range. Meanwhile, slippage has generally been less than 10BPS on trades up to $1M.
Source: pure.gearbox.fi
  • PURE settled $45K in profits in week 1 as lenders still earned positive APYs. Trades on PURE are settled on DEXs and not against lenders' supplied asset. Thus, even though the traders realized a positive P&L against the USDC pool, the lenders still earned a positive organic APY. Making leverage non 0 sum.
Source: charts.gearbox.fi
  • PURE borrow rates remain <13% per annum despite funding fee increasing. As funding rates skyrocketed over the last few weeks, PURE's ETH borrow rates remained <13% while BTC and alts remained below 10%. This is due to a combination of using spot prices and lending market borrow rates inherently being lower.
Source: pure.gearbox.fi
  • πŸ’¦πŸ”¬ Tx-Level Alpha: These transactions show leverage trades worth over $1M each happening natively on Uniswap and Curve. PURE, through its composability, is able to boost activity of other DeFi protocols it utilizes. It further executes all required actions from borrowing to creating a leveraged position in a single transaction, providing seamless UX through Account Abstraction. Since launch PURE has increased Uniswap's trading activity by $20M and Curve's by $6M, displaying how composability fosters growth.

β‘€ Aave πŸ‘»

πŸ“ˆ Aave crossed $125M in annual fees, 23k+ users

  • Aave is an EVM-compatibile liquidity protocol that allows users to deposit assets, earn interest, borrow and build composable applications on top of. There is currently $11.5B of liquidity is locked in Aave across 8 networks and over 15 markets. The protocol generated $125M in cumulative fees since January 2023, with annualized fees projected to hit $286.6M in 2024, which would generate $100M+ protocol revenue.
Source: Token Terminal
  • Aave v3 saw a material surge in deposits and borrows beginning in Q4 2023 that has continued into the new year. DAI deposits have made up >85% of all new volume during this span with, with WETH, USDC, and USDT taking material shares of borrowed assets on the platform.
Source: Dune Analytics - @KARTOD
  • Looking at high level competitive dynamics in the lending sector, AAVE remains the clear market leader across major onchain metrics - daily fees, active loans, and TVL. Compound is sitting at 1/3 and Liquity at 1/10 of Aave's fees, loans and TVL.
Source: Token Terminal