A Decentralized Exchange (better known as DEX) is a peer-to-peer marketplace facilitating permissionless trading to and from traders with the use of a crowd-sourced Liquidity Pool. You’ve probably guessed it, DEXes are the backbone of DeFi and a core contributor to offering traders a suite of DeFi tools & products.
Coingecko indicates that there’s a staggering $54Bln in Total Value Locked (TVL) within DeFi. In an ecosphere driven by Capital Efficiency and money chasing its highest yields, protocols strive to innovate and serve the ever-growing needs of its users. The protocol ticking all of these boxes eventually dominates DeFi. For instance, the leading DEX, Uniswap, boasts of a staggering $520M in Daily Volume with a $4.54 Bln TVL. Its recently launched Uni v3 offers unparalleled capital efficiency with tight liquidity ranges for optimized volume. This has resulted in the DEX generating an 11.4c in daily volume for every $1 in a liquidity pool — no DEX within DeFi has been able to match such a feat and its competitiveness.
You get the gist of it, Capital Efficiency is important and innovation is a continuous process. In this article, we’ll be exploring why USD+ is the optimal token of choice for DEXes looking to maximize efficiency and get the most out of their TVL.
What is USD+?
The saying within DeFi goes that money lying idle is an untapped source of yields. A user not utilizing their assets loses out on the opportunity costs (i.e, the alternative source of yields that they could have earned had they invested it in a Yield-Generating source). Overnight Finance’s Flagship Stablecoin — USD+ — solves exactly this!
To start things off, USD+ is a Fully-Collateralized Stablecoin collateralized by the most secure stablecoins within DeFi (USDC, USDT, DAI, etc) and can be minted/redeemed with the appropriate amount in USDC. To maximize efficiency and realize yields, the protocol invests its collateral across a diversified array of Yield-Generating Liquidity Pools (lending on AAVE, Stable-to-Stable Pools, etc). The yields realized are passed on to holders on a daily horizon which means that they earn yields merely by holding the Stablecoin. This makes navigating DeFi relatively straightforward for the novice user and in doing so, appeals to investors with a low-risk appetite. The Stablecoin has been able to generate 8–12% APY since inception owing to its rigorous strategies & methodology.
This approach can be summed up in 6 steps and is illustrated in the following image:
The Role of USD+ in Helping DEXes Maximize Efficiency
For DEXes to maximize value accrual from their TVL, they must generate the maximum possible revenue from Liquidity Pools. The more the value accrual, the more revenue that the protocol can pass on to its stakeholders. Considering that DeFi has been facing a downturn owing to a bear market, generating revenue becomes even more quintessential as lesser liquidity is available to realize revenue from.
Similarly, the rational user seeks to maximize yields from their Yield-Farms. DeFi has been accustomed to constant diluted APRs (returns decreasing over time as prices of reward tokens decline); this encourages liquidity to move around in search of the highest yields. Relatively unattractive yields fail to attract sufficient liquidity needed to facilitate trades at low slippage/price impacts thereby acting as a deterrent in attracting much-needed volume.
This puts the protocol in a dilemma: facing an intense emissions schedule to establish deep liquidity or risk liquidity being withdrawn in search of the next highest yield.
The solution to both of the above scenarios has proved to be USD+. The stablecoin has proved to generate 20–25% more volume than USDC on Dystopia (a ve 3,3 DEX on Polygon) as a % of TVL. This means that the same $1, when used to incentivize USDC TVL, could generate a higher volume if USD+ were to be incentivized. What makes USD+ such a good fit? It’s simple — the secret is arbitrage! The Stablecoin can be redeemed for 1 USDC at any given time and being under/over the peg on the open market means that it can be bought or sold and arbitrageurs can profit from the difference. Although arbitrageurs can usually step in, the protocol itself employs arb bots for this purpose at tighter ranges for enhanced volume.
Similarly, LPs earn more yields with USD+ than if they were to Yield-Farm with USDC. This is because they are accruing yields generated from USD+ in addition to Gauge Pool rewards & Swap Fees — a narrative that effectively makes it more attractive than any other stablecoin.
Some of the many DEXes incentivizing USD+ can be found as follows along with how it compliments them.
Velodrome has proven itself to be the missing piece of the puzzle to Andre Cronje’s ambitious ve 3,3 model. The DEX boasts a vast $82M in TVL and is the leading DEX on Optimism — a growing L2 chain.
The DEX utilizes a Gauge Voting mechanism when determining a given epoch’s emissions and prospective protocols looking to gain a share of the emissions must go through a bribing mechanism. This means that they must incentivize veVELO token holders — the protocol’s governance token — with bribes to encourage token holders to vote in their favor. Subsequently, the higher the bribes, the higher the share of total votes and hence, emissions.
The bribing mechanism has proven to be a tremendous success with Epoch 18’s cumulative bribe ranging around a staggering $200,000+. It’s fair to assume that the bribing mechanism is competitive as there are around 28 active bribers on the DEX.
To get a share of the pie, Overnight has adopted an approach unlike no other. The innovation in this regard is that yields from USD+ within a Liquidity Pool are passed on as bribes to veVELO token holders (by calling the skim function). This means that as TVL grows, the yields generated by USD+ increase that are in turn, used as bribes. More Bribes equals more APRs and hence, incentivizes the current Liquidity in the said pool to stay unhindered.
The mechanism has proved to be self-sustaining as the bribes have consistently averaged between $3,500-$5,000 (subject to yields generated). While protocols essentially pay for bribes, the APYs from USD+ have achieved this on their own. Read here for more information on this.
Swapsicle is a derivative of Uni v2 on Avalanche and emissions are allocated via the protocol exercising its best judgment. It can be said that choosing to incentivize USD+ TVL has proven to be a shrewd decision. Like Velodrome, USD+ yields within a Liquidity Pool on the DEX are skimmed and used to buy back the protocol’s native token — $POPS.
This serves as a gradual buy pressure for the inflationary token and enables the protocol to counter some of the emissions generated.
Dystopia is the equivalent of Velodrome on Polygon and the DEX, upon realizing the benefits of USD+, has chosen to incentivize USD+ liquidity for crucial pairs. Encouraging liquidity to stay unhindered is a challenge for every DeFi protocol yet Overnight compliments exactly this.
The inherent model of DEXes is that the value of an inflationary token in a bear market takes a downturn as more of the same tokens are printed to reward liquidity. In this case, some of the reliance on the inflationary token as a means to sustain the TVL is reduced as Yield-Farmers earn yields from USD+ in addition to Gauge Pool rewards (think of it as boosted APRs). Since the model of a ve 3,3 DEX involves passing on swap fees to voters of the pair, USD+ has generated relatively more trading volume as a % of TVL (20–25% more) than USDC — therefore the stablecoin has proved to be the most optimal voting choice by ROI.
DEXes have much to gain from USD+ and its yield-bearing nature. The possibilities are endless and the value accrual to protocols is vast as evidenced above.
If you’re a DEX looking to maximize returns from your TVL, get in touch with the Overnight team so that we can elaborate more on its benefits.