DeFi Pulse Now Grades Decentralized Finance Risks

https://decrypt.co/45027/defi-pulse-now-grades-decentralized-finance-risks

Crypto investors have a new reference point for evaluating decentralized finance projects, thanks to a new risk indicator from DeFi Pulse.

DeFi Pulse announced on Tuesday the release of the DeFi Pulse Economic Safety Grade, developed in partnership with blockchain simulation platform Gauntlet Networks, to give users a way to better understand the risks they’re taking when locking value in DeFi protocols. 

The Economic Safety Grade is calculated on a scale from 0 to 100 and measures a protocol’s risk of insolvency, with higher scores indicating a safer investment. It’s another sign of an industry working to break into the mainstream and become more accessible to novice users.

DeFi, short for decentralized finance, is an emerging industry based on a variety of blockchain-based protocols that use code known as smart contracts to provide financial services like loans or interest. Instead of relying on centralized third-parties like traditional banks, DeFi protocols use value contributed by users in the form of cryptocurrency deposits to provide financial services; users receive interest income in return.

DeFi Pulse has become one of the leading indicators for tracking the growth of DeFi and identifying quality protocols, using blockchain data to measure the total amount of value locked (TVL) in DeFi protocols and providing basic information about projects’ functionality.

The DeFi Pulse Economic Safety Grade measures the risk of protocols becoming insolvent—that is, when the value of contributed collateral is less than the total value of all loans that have been issued. If a protocol becomes insolvent, users that have contributed cryptocurrency to be used by the project are at risk of getting back less crypto then they put in, or, in a worst-case scenario, none at all. 

Grades have been assigned to two DeFi projects so far, lending services Compound and Aave, which earned a 91% and a 95%, respectively. Scores are updated in real time based on potential price movements and borrowing patterns.

Aave Raises $25 Million to Bring DeFi to Institutions

DeFi is still a young industry, having only recently caught the attention of crypto enthusiasts—it took nearly three years for TVL in DeFi to gather its first billion, which it hit on June 2020, but less than four months to go from $1 billion to $10 billion

The next wave of growth will likely rely on drawing in users with little or no experience with crypto. If so, the DeFi Pulse Economic Safety Grade could be a valuable tool in helping those users stay safe, invest wisely, and stick around for the long term.

Is decentralization the answer to DeFi’s SEC problem?

https://decrypt.co/37338/is-decentralization-the-answer-to-defis-sec-problem

The creators of the third and fourth largest DeFi (decentralized finance) protocols, Synthetix and Aave, this week took steps to further relinquish control over the networks to their token holders, ending their reign over the networks they have spent the last few years building.

Decentralizing the network is a common card played by DeFi projects to give control to their users, who can use it to vote on the future of their network without having to rely on some centralized organization.

Decentralizing also keeps regulators off the protocol creators’ backs. They generally operate without licenses—but if nobody controls the network, nobody can be held accountable by government authorities, including for securities violations, which were the downfall of crypto startup fundraising through ICOs

Lawyers told Decrypt that DeFi projects are destined to draw the ire of regulators, who are starting to pay more attention to the thriving, $4 billion industry. Since June 1 the amount locked up in Synthetix has quadrupled to $496 million; Aave on Sunday peaked at $600 million, a nine-fold increase.

“Developers who create a market for synthetic securities are playing with fire, period,” Josh Garcia, a partner at New York law firm Ketsal, told Decrypt

But the founders of Aave and Synthetix told Decrypt that there was never any risk to begin with. And even if regulators found a way to prosecute them? “It’s unstoppable,” said Stani Kulechov of Aave, the decentralized lending protocol he founded.

Out of their hands

First came the announcement from the Synthetix Foundation, the non-profit that heretofore acted as a steward over its decentralized exchange for tokenized stocks, fiat currencies and commodities. On Tuesday, the Foundation announced that it would dissolve into three DAOs (decentralized autonomous organizations). 

Decentralized lending protocol Aave followed a few days later. “Aavenomics,” proposed Kulechov, would be the latest milestone on “the journey towards a more decentralized governance.” Aavenomics introduces a bolstered governance system that lets token holders vote on future network upgrades. “In practice, we build whatever our community decides,” he said. 

There’s another angle: regulators are starting to pay more attention to decentralized finance. Earlier this month, the US Securities and Exchange Commission and the CFTC, pounced on San Francisco-based crypto stocks platform Abra, and prevented it from offering tokenized versions of stocks and fiat currencies. 

That’s similar to the product offered by Synthetix—only Synthetix’s users trade among themselves and the protocol’s owners don’t collect fees, whereas Abra is a for-profit entity that executes trades on its platform on behalf of its customers, Kain Warwick, the former director of the Synthetix Foundation, told Decrypt. 

Both Kulechov and Warwick said that their announcements this week were not related to the Abra case. Kulechov said he’d been working on Aavenomics since the day after Aave launched, January 8, and that he published the proposal as soon as his protocol swelled with money. “We feel that our team should not govern the future of something that is [a] public goods in its nature,” he said. 

Warwick said that his announcement followed the commencement of the Australian tax year—not Abra. He has gunned for the Foundation’s dissolution ever since 2018—it was a “mistake” to create it, he said; hiding behind a non-profit is a “net negative” for a decentralized protocol, he wrote on Tuesday. 

Still, perhaps their announcements came just in the nick of time. The Abra case made things clear: regulators are quickly picking up on crypto finance. 

“Without naming names, DeFi is littered with apparent [regulatory] violations that regulators have yet to enforce against,” Preston Bryne, a crypto-specialist for legal firm Anderson Kill who said he was unfamiliar with Synthetix or Aavenomics, told Decrypt. Those promoting DeFi projects “are taking a very big gamble by doing things in a noncompliant fashion,” he said.

Projects that aren’t sufficiently decentralized could soon be caught out. Kulechov previously told Decrypt that he’s lawyering up. “In our case, we have to increase our legal resources and ensure that our protocol is sufficiently decentralized,” he said. 

But neither Warwick nor Kulechov are deeply concerned by regulators. Warwick said that his company has been careful to avoid the missteps of previous crypto projects. “We’ve been very careful to ensure that any clear lines that regulators have drawn—we didn’t step across.” He added, “we’ve never actually had a regulator reach out and raise any questions or concerns about what we’ve been doing.”

Garcia added that the SEC may still come for DeFi just like it came for ICOs, the fundraising method du jour for crypto projects a couple years ago. Kik, Telegram, Gladius and Block.One are among projects that have bled money fighting lawsuits.  “The SEC is likely to hold – and has historically held – developers responsible for launching unregistered securities exchanges,” he said.

Kulechov said his plan is to become sufficiently decentralized—i.e. with no central point of accountability for a regulator to bite at. “From a regulatory perspective, for example, Ethereum is seen as decentralized enough [because] it does not have an entity behind [it],” he said.

The term, “sufficiently decentralized,” was coined by SEC’s William Hinman in a speech about Ethereum and the Howey Test in 2018. Should a network be “sufficiently decentralized,” he said–“where purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts”–then “regulating the tokens or coins that function on them as securities may not be required.”

Kulechov said It’s tough to tell whether Aave is currently at risk. “I think it’s difficult to assess as there is no framework for decentralized finance at the moment, but I guess all protocols need to mind that some regulation might apply if they are not sufficiently decentralized. The ‘sufficiently’ part is the challenging one.”

It’s a gray area, one he said is “painful for regulators.” Since Kulechov doesn’t actually operate the protocol, nor does he collect any fees, it’s a stretch for regulators to call it an unlicensed money transmitter, he said. “It’s [a] peer-to-Smart-Contract system.” 

Garcia, the lawyer, said that “decentralization” is a mushy word. “When people say ‘decentralized,’ it can mean a dozen different things. For instance, a project can claim to be decentralized but may have centralized administrative rights or governance control over the core protocol. 

“A term without definition cannot be a reliable shield,” he said. “Regulators will look to the facts and circumstances of each case, and will not rely on a company’s marketing to make an enforcement decision.”

Should anyone doubt him, there’s a graveyard full of “decentralized” ICO projects, buried due to their cases with the SEC, that would beg to differ.

Aave Announces Aavenomics Token and Governance Upgrade

https://defirate.com/aavenomics-upgrade/

Aave, the rising money markets protocol, announced its token and governance upgrade Aavenomics: a formalized path to the decentralization and self-sustainability of the network.

For those looking for a quick TLDR, check out the post’s sleek Flashpaper. For those looking to do a deep dive, the full interworking cans be found here.

Token Economics

The upgrade features a handful of key additions and changes to the growing lending protocol. First and foremost, Aave’s native token LEND will migrate to a new token AAVE at a rate of 100: 1 following approval from LEND holders via the Genesis Governance Poll. In turn, the total supply will shift down from 1.3B LEND down to 16M AAVE.

While 13 million AAVE will be claimable by LEND holders at the aforementioned rate, the remaining 3M AAVE will be allocated to the Aave Ecosystem Reserve – a bootstrapping fund for protocol incentives governed by AAVE tokenholders.  The protocol’s ecosystem reserve will be allocated between a handful of different incentives, including both the “Safety” and “Ecosystem” incentives. With that, the reserve’s Safety incentive allocation will be distributed to holders who deposit AAVE into the Safety Module (SM). The Safety Module acts as an insurance reserve for Aave users in the instance of a shortfall event and in return, will receive rewards along with a percentage of the protocol fees. With that, it’s important to note that Aave will be transitioning away from the current burn model in favor of this dividend-like token model.

What’s interesting about the Safety Module is that it not only features vanilla AAVE in the module but it also leverages a Balancer pool to incentivize market liquidity. Naturally, the Balancer pool will also accrue BAL rewards and trading fees for Safety Module Stakers on top of the protocol’s native incentives – showcasing DeFi’s composability at its finest.

The other piece to the incentive puzzle is the introduction of Ecosystem Incentives. In line with the current trends in DeFi, Aave will be implementing a liquidity mining mechanism into the protocol. Therefore, users who supply or borrow assets from Aave will earn rewards.

Lastly, Aave governance may also elect to allocate a portion of the Ecosystem Incentives to fund or bootstrap applications building on the Aave ecosystem.

Governance

With the introduction of the Aave Ecosystem Reserve along with the team’s dedication towards decentralization and self-sustainability, Aave Governance is a critical piece to the Aavenomics upgrade.

The driving force behind Aave Governance is the introduction of Aave Improvement Proposals (AIPs) which represent modifications to the protocol that are ratified on-chain by AAVE tokenholders. An interesting design piece to this is that users who holder AAVE in cold storage or even staked via the Safety Module can use their token weight to vote on AIPs. Passive tokenholders also have the option to delegate their voting power to Aave Protocol Politicians.

Aave tokenholders will also play a role in adjusting Aave Policies, a set of governance defined rules that control the parameters behind the protocol, and individual money markets. As such, there are two main types of policies available for governance changes.

The first is Protocol Policies which dictate the overarching behavior of the Aave Protocol including risks, improvements, and incentives. The second is Market Policies which define the context and parameters behind each market within the protocol, like the Uniswap Money Market or the TokenSet Money Market. Changes to Market Policies may include adding or removing supported assets, adjusting loan-to-value ratios, or modifying interest rate models.

Closing Thoughts

With Aave’s explosion into the DeFi ecosystem this year along with their ability to consistently innovate with new products, like credit delegation, the Aavenomics announcement is right on brand with what the team has built to date.

The protocol is not only introducing emerging trends prevalent in DeFi like yield farming but also leveraging the blooming composability available within Ethereum’s DeFi ecosystem. The introduction of the Aave Safety Module provides AAVE tokens with a claim on the protocol’s cash flows while also featuring a Balancer pool to maximize rewards.

While the exact timeline on the Aavenomics mainnet launch has been kept high-level, we can expect that this upgrade will serve as a driving catalyst for Aave’s next leg in growth similar to Kyber’s recent upgrade in early July or the announcement of Bancor V2.

At the time of the announcement, value locked in the Aave protocol is up 13.2% to $424M in total assets while LEND surges 16% to $0.31 valuing the protocol at $395M.

If you’re interested in staying up to date, make sure to follow Aave on Twitter. For those looking to get involved in the discussions surrounding Aavenomics, make sure to join the official Discord!

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Aave Raises $3M for Aavenomics Governance Migration

https://defirate.com/aave-governance-raise/

Aave – a sector-leading lending protocol – has closed a $3M round on the back of LEND tokens in lieu of their upcoming Aavenomics upgrade.

Positioning themselves as a protocol for money market creation, Aave’s latest round saw $3M worth of contributions from Three Arrows Capital and Framework Ventures when LEND was $0.10 per token. Since then, LEND has soared to over $0.25 per token ahead of an Aavenomics governance upgrade in which LEND will migrate to AAVE with a suite of new protocol incentives.

This comes in tandem with other reputable funds like ParaFi and Spencer Noon’s DTC Capital, both of which have made it public that they also hold significant positions in LEND. DeFi Rate has also received intel that many other prominent DeFi funds have been accumulating positions in LEND, giving good credence to the DeFi token‘s parabolic growth in recent weeks.

Aavenomics Teaser

The raise foreshadows the launch of Aavenomics – a governance upgrade in which the migration to AAVE will introduce new protocol incentives through staking and yield farming. In short, users will stake AAVE as insurance against protocol deficits in return for both AAVE rewards and the vast majority of protocol fees. The staking module is expected to offer both vanilla AAVE staking in tandem with an 80/20 AAVE/WETH Balancer pool. This gives flexibility for those looking to stake with just AAVE while incentivizing those to provide market liquidity to Balancer in exchange for BAL rewards and swap fees.

AAVE staking comes in tandem with yield farming rewarding from protocol usage, similar to COMP and BAL liquidity mining schemas which have driven exponential growth in recent weeks. While the details have yet to be released, we expect users to earn AAVE rewards from lending and borrowing any of Aave’s 20+ supported assets along with special liquidity incentives similar to Synthetix‘s LP rewards.

Distributed Governance

Outside of vast protocol incentives, AAVE governance will distribute key decision making to tokenholders though onchain voting. Using Aave Improvement Proposals (AIPs), AAVE holders will dictate key protocol, market and risk policies for both Aave and different money markets like the Uniswap Money Market. Aave has vocalized that its governance process is meant to stimulate large amounts of discussion before going to an onchain vote, contrary to what we’ve seen so far with Compound and it’s 48-hour window voting periods.

These upgrades will be publicized in a formal Aavenomics governance paper in the next two weeks, kicking off a countdown to Genesis Governance in which LEND tokenholders will be able to vote on the start of AAVE migration in tandem with the proposed incentive allocations mentioned above.

Credit Delegation

Last week, we covered Aave’s proposal for Credit Delegation, essentially letting any two parties enter into undercollateralized lending agreements to use a counterparties capital as collateral to draw a line of credit with aTokens. While the program is set to be largely limited to OTC trading desks and exchanges to start, Credit Delegation is another example of Aave’s continuous innovation in the vibrant DeFi sector.

Aave Continues to Shine

As if it wasn’t clear enough, Aave has solidified itself as a force to be reckoned with in the great crypto landscape. With top firms publicizing their token holdings in tandem with the upcoming Aavenomics, it’s clear that the protocol for money market creation has a very bright future lined up for the coming months.

It’ll be interesting to see how the lending wars pan out, with protocols like Aave, Compound and bZx fighting for TVL in a rapidly growing sector full of strong incentives.

If one thing is for sure, DeFi Rate plans to play a big role in Aave governance and will be introducing a formal protocol bid upon the launch of Genesis Governance in a few week’s time.

To stay up with Aave, be sure to follow them on Twitter or join the conversation on Discord.

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