Uniswap is DeFi 👑 but $UNI ain't worth 💩

Uniswap is the crown jewel of DeFi. The biggest gas guzzler, Uniswap. The biggest dex despite offering no additional incentives, again Uniswap.

sushi is close in terms of TVL mostly because of LP incentives but pales in composition when it comes to activity.

They have a clear vision to develop and run the best AMM. They are a startup and it’s been nurtured by the best VCs in the space. As a startup, they are unconcerned with revenue right now and only focus on having the monopolistic market share.

The $UNI token though is a hard sell. The Uniswap team was originally disinterested in having a token but they were faced with the existential threat of the Sushiswap idea ( to have a “community-owned” fork of the protocol, that will use yield-farming incentives to migrating liquidity from Uniswap ). So they gave the community what they wanted, the $UNI token. 15% of all tokens were distributed to give 400 UNI to every address that ever interacted with it, plus a liquidity mining programme. $SUSHI lost its charm, ethereum was choked, everyone was happy.

The irony is, the most valued Governance token does no governance at all. You need 1% of all UNI to make a proposal and at least 4% has to vote for anything to go through. In more than six months of its existence, there have been only three proposals. Two of those were basically Dharma and other apps trying to get airdrops for their users.

Uniswap has had only 3 proposals since its inception

Yearn ( also a pure governance token ) recently voted on Yearn Improvement proposal 61.

In the last 4 weeks, Yearn governance has voted on 3 proposals

The market seems convinced that every project that has a token automatically entitles them to some kind of ownership/ security like properties. This can’t be further from the truth. Tokens will actively avoid looking like securities because of the regulatory nightmare it will lead to. Since the SEC hinted that BTC and ETH are not securities but utility tokens, every project has been striving to fit into this category.

The utility of DeFi tokens comes not from any legal status but from the fact that their use is written into the protocol on the blockchain. Think of staking AAVE to secure the system or Dai stability fee being used to burn MKR.

Governance though is trickier to enforce in a protocol. The way it’s current implemented, it’s a signalling tool at best. Even Yearn developer Andre Cronje ( the person seen as a pioneer of the trend) decided to unilaterally merge protocols without any governance interaction, demonstrating how the real power is mostly with the dev team.

Cash flows

As an investor, what I am looking for is cash flows that are worth more to me than the risk I perceive. The monetary value of government power that is unenforced by law or blockchain is too unpredictable for me. But DeFi is vast and diverse, so there are many tokens that offer incentives what we could count as cashflows.

Tokens that offer staking rewards or have buyback/burn mechanisms are nothing new. For a long time, it was the norm for projects building on ethereum, to raise money by offering tokens that serve some purpose in the protocol. One issue is that distributing profits may not be the right thing to do. Even successful protocols need to focus on growth instead of charging customers, given the intense competition. So the utility of most of these tokens was some sort of a discount/ premium-plan-enabler for using the protocol.

Take Synthetix for example, It allows users to mint synthetic assets that represent gold, tesla stock, US dollar, etc. The SNX token is used as collateral to mint these synthetic assets (can also be staked to receive a cut of protocol fees).

They will eventually introduce other tokens as collateral too but I have a feeling that this kind of tokenomics gets in the way. Wouldnt ETH or DAI be a better choice as the original collateral ? It would make the protocol instantly usable to a lot more people, grow faster and also be safer ( ETH/DAI prices would be much more stable that SNX for collateral ). The current model also forces the customer to be the investor which will deter some from using it.

Yield Farming

Last year saw explosive growth around DeFi and it was set in motion by a rather idealistic goal. For a long time now, the ethereum community has had this vision of protocols being governed in a decentralised way. Compound finance decided to delegate governance to the community with the introduction of the COMP token. They raised money privately for developing the protocol and never had a token until then. It was meant to be only for governance, distributed to users over time, proportional to their usage of the protocol.

The value of COMP and activity on compound finance exploded making the whole space aware of two things,

• People are pricing governance tokens very highly, even when the protocols are very explicit that they are not meant to have monetary value.
• This style of tokenomics which costed the protocol nothing, was a great way to attract capital. Most DeFi protocol get more efficient as the volume increases ( notice the obsession of this space with TVL - total value locked ).

This style of tokenomics, known as ‘yield farming’ quickly took over DeFi.

Curve

For me, Out of the many prominent DeFi protocols Curve offers the best value proposition for token holders with the CRV token.

the current curve UI

You find it on LinkedIn or Crunchbase. Good luck finding a landing page for their website. No, you just jump right into the dapp designed to scare new users. There are some whispers that they have something to with Switzerland because Dex’s are regulated liberally there.

Curve is a DAO. But unlike something like YFI, CRV is a governance + utility taken. CRV lets you vote on all matters of the protocol, everything from what pools to add, how revenues should be split, and how much boost per pool (more on that below).

The utility of CRV is very intertwined with the liquidity incentives (yield farming) of CRV. When you provide liquidity on Curve you get a part of the trading fees and also receive CRV on top. Most CRV will be distributed this way, these incentives are designed to go on forever but with diminishing returns.

The other part of the trading fee is distributed to those who lock up their CRV. The longer you lock up your tokens for higher your payout will be.

These rewards are denominated not in CRV but 3pool (basically USD) because governance allowed the communities desire for ‘stock with dividend’ like properties. Currently, this works out to a single-digit P/E ! Also, the source of these earnings is trading, which is not incentivised, meaning these revenues are very reliable.

This is not all, Locking up your CRV entitles you to another important benefit : ‘Boosting’. Basically you can get up to 150% more CRV as ‘liquidity provider incentive’ depending on how much CRV you lock up. This is made even more lucrative by the fact that this boost increases if you provide liquidity to multiple pools.

This kind of tokenomics uses yield farming in a sustainable way to form long-term relationships with liquidity providers, while people who trade on curve all get the same fair terms and don't have to deal with any complexity.

P.S. If locking your tokens is a deal-breaker for you, a better option would be Yearn which has always been well integrated with Curve. Yearn uses a ‘backscratcher algo’ which lets people perpetually lock up CRV in exchange for a yveCRV token that gives you all staking rewards they are entitled to plus a cut of the boost that the locked CRV provides to Yearns Curve vaults. Instead of locking up CRV on yearn you can just buy yveCRV on the market at a slight discount to CRV.

Edit 1: This article was written over a long period and rates and values change drastically in DeFi so always check current stats from the source.

Edit 2: Uniswap V3 is a game-changer but it does not invalidate anything that is said in this article. I will do an article on Uniswap V3 vs Curve from the user perspective soon.

sources

DeFi TVL : https://defillama.com/home
Ethereum Gas stats : https://etherscan.io/gastracker
Curve rewards stats : https://curve.fi/usecrv
UniSwap Governance : https://app.uniswap.org/#/vote
Yearn Governance : https://snapshot.org/#/ybaby.eth // https://snapshot.org/#/yearn
Understand yveCRV: https://docs.yearn.finance/how-to-guides/how-to-understand-yvecrv
Jebus Tweet : https://twitter.com/jebus911/status/1380154418251849735?lang=en