Lending – Weekly fundamentals #72

A walkthrough of the most interesting charts and trends in crypto, with a focus on key business drivers and protocol fundamentals.

This week’s newsletter focuses on the lending market sector, which has a designated dashboard on Token Terminal. Let’s dig in!

Lending protocols are smart contract-based marketplaces that allow for the permissionless lending and borrowing of assets.

Introduction

• Lending protocols are smart contract-based marketplaces that allow for the permissionless lending and borrowing of assets. Lenders deposit their funds as collateral, which can be used to secure a loan. Lending protocols typically generate revenue by taking a cut of the interest paid by borrowers.
• Lending protocols are transparent and operate on a global scale, removing the need for intermediaries such as banks. Acquiring loans from traditional financial institutions typically requires extensive and time-consuming background checks. On the other hand, onchain lending protocols offer permissionless access to lending markets. Balances held by lending protocols can also be publicly monitored, preventing user assets from being lost through inadequate management.
• The majority of DeFi lending protocols only offer overcollateralized loans with variable-interest rates. The majority of onchain lending protocols only provide variable-interest-rate loans, as it offers greater control over capital allocation. For example, if a particular asset is close to being completely borrowed on a protocol, its corresponding borrowing rates will increase drastically to discourage further borrowing. In addition, DeFi is generally anonymous by nature, which prevents the use of credit assessments and undercollateralized loans.
• Newer lending protocols are specializing in product features such as fixed-interest rate loans and undercollateralized loans. Notional Finance offers fixed-interest rate loans through liquidity vaults with predetermined loan maturities, allowing borrowers to accurately predict the performance and risk of their positions. Similarly, Maple Finance facilitates undercollateralized loans to accredited borrowers. These protocols are able to provide predictable and capital-efficient loans and are thus especially attractive for institutional borrowers.

Overview

The daily active loans and total value locked since the beginning of the year for the top projects in the lending market sector are visualized below.

Scope of analysis

• Aggregated active loans across the lending sector increased from $3.5b to $5.5b since the beginning of the year. Aave, the current market leader with approximately 50% market share in active loans, saw the value of its active loans grow from $2.1b to $2.8b over this period.
• Radiant Capital and Morpho have outperformed competitors based on active loan growth. Since the beginning of the year, active loan volumes for Radiant Capital and Morpho have surged by 370% and 63%, respectively. A large part of Radiant Capital’s rapid growth can be attributed to its recent expansion to BNB Chain in late March. BNB Chain active loans for Radiant Capital now amount to $110m, approximately 35% of their total active loans.
• Market sentiment is a key driver of borrowing demand. Active loan volume is an indicator of market demand on leverage, as users are able to borrow assets to increase their exposure. Aggregated active loans peaked at $24.1b during the market cycle top in Q4’21 and bottomed out in Q1’23 at $3.5b, a drawdown of over 85%. Since then, active loans have been on a general uptrend, as the price of Bitcoin has simultaneously risen from ~$16k to ~$30k.

Aave

• Approximately 2% of Aave’s total fees since the beginning of Q3'23 were generated by flash loans. Flash loans are a type of loan where a user borrows and returns assets within the same blockchain transaction. Users are allowed to borrow the full amount of available funds, with no upfront collateral required. Since the beginning of Q3'23, Aave generated just under $270k in fees from flash loans alone.
• Most of this came from a flash loan on June 12th, where over 50k wstETH and 60k wETH were borrowed. The borrower paid 25 wstETH and 30 ETH in fees to Aave when taking this flash loan. The accessed funds were used to conduct a smart contract exploit on Sturdy Finance, draining the protocol of $750k.
• Although flash loans are widely known for being used in exploits, they also have many positive use cases. Flash loans are popular for arbitrage, debt refinancing, and more. In the case of arbitrage, users can use flash loans to take advantage of the difference in asset prices between two exchanges. Similarly, if the borrowing interest rate becomes too high for a certain asset, users are able to refinance the debt to another asset using flash loans without convoluted repayment and borrowing transactions. Protocols themselves should be building robust code to prevent flash loan attacks, rather than having lending protocols limit flash loan functionalities.

Compound

• Interest rates for supplying USDT on Compound spiked to 32.5% on March 11th during the USDC depeg. Over $50m in USDT loans were taken out on March 11th as investors pivoted away from USDC. In addition, approximately $140m worth of USDC loans were repaid during this event, decreasing its corresponding active loan volume from $420m to $280m.
• Compound’s variable-interest rates for USDT were readjusted higher automatically to incentivize more deposits and fewer borrows. A high borrowing volume relative to supply led to an increase in the utilization ratio for USDT. Based on this ratio, Compound’s smart contracts automatically raised the interest rates to attract more USDT deposits/repayments, and fewer USDT borrows.
• Some investors profited by taking out loans in USDT and swapping the assets to discounted USDC, speculating on a USDC repeg. In addition, existing USDC borrowers were able to repay their outstanding debt at a discount. These strategies, along with the relative stability of USDT, incentivized users to transition their debt from USDC into USDT.

Venus

• Venus generated $14.4m in fees from vBNB borrows over the past 180 days. This was more than 57% of the total fees made by Venus over this period. Daily fees peaked at $1.1m on March 22nd, 2023, of which $1.0m were from vBNB alone.
• vBNB borrowing spikes are largely driven by Binance Launchpads, which require BNB tokens for participation. Binance Launchpad is a platform for projects to attract new investors by offering a portion of their tokens for sale. Investors purchase these tokens by committing their BNB to a specific launchpad on Binance. vBNB active loans tended to spike during launchpad events, as users borrow BNB to participate. A prominent example is the Binance Launchpad for Space ID in mid-March, where vBNB active loans volume spiked from ~$65m to over ~$350m. Loan volumes quickly returned to previous levels as the launchpad drew to a close and users repaid their positions.
• Supplying BNB on Venus during Binance Launchpads represents a lucrative BNB yield opportunity for investors. Interest rates for supplying BNB spiked up to 65% during the Space ID launchpad. Overall, Binance Launchpad events represent a lucrative opportunity for BNB depositors on Venus.

Other key highlights from the lending market sector

Aave

• On July 15th, 2023, Aave launched GHO, an overcollateralized stablecoin native to the Aave ecosystem. GHO can be minted by depositing collateral on Aave, with staked AAVE holders receiving a discount when minting. All interest accrued by GHO is transferred to Aave’s DAO treasury. As of July 18th, 2023, over $3m GHO has already been minted.

Compound

• Compound recently announced a change of leadership, with the previous Head of Design, Jayson Hobby, taking over the CEO role. Compound’s Founder and former CEO, Robert Leshner, announced the founding of Superstate Funds. The new company aims to bring regulated financial products to the blockchain.
• Token Terminal has also recently integrated Compound v3 (Ethereum) data - check out the dashboard here.

Euler

• Euler fell victim to a smart contract exploit on March 13th, 2023, where ~$200m in user assets were stolen. On April 5th, 2023, Euler announced that they had received all recoverable funds from the hacker, making it one of the largest exploit recoveries in DeFi history. Operations for the Euler protocol are still halted, with plans for a v2 launch later in the year.

Morpho

• Morpho recently announced an upgrade to its brand identity, a first step towards its developmental plan for a new trustless and efficient lending primitive.
• Token Terminal has also recently integrated Morpho Aave v3 data - check out the dashboard here.

Notional Finance

• On March 28th, 2023, Notional Finance announced their upcoming v3 release. This version introduces the prime money markets feature, which adds variable interest-rate functionality on top of Notional’s existing fixed-rate product. Lenders are able to earn higher yields, as unutilized funds will be lent out to external lending protocols. Fixed-rate debts will also be automatically converted to variable-rate positions upon maturity, improving borrower UX.

Radiant Capital

• Radiant Capital plans on deploying on 4-6 chains by Q4’23, including a launch on Ethereum Mainnet in Q3’23. The team is also focusing developmental activity on adding cross-chain features, such as chain-agnostic loan repayments, cross-chain liquidations, and more.

Venus

• Venus recently launched their v4, which introduces Isolated Pools. Isolated Pools manage assets in silos, which prevents potential smart contract exploits from draining liquidity from the entire protocol. It also allows for more flexible management of custom rewards for each pool.
• Token Terminal’s integration of Venus v4 data is currently in progress.

Changelog

Recent updates and improvements to the lending market sector on Token Terminal.

Video of the week

In this episode of the Fundamentals podcast, we’re joined by Chris Abiaad, the founder of frens capital – a thesis-driven investment fund focused on liquid digital assets. frens capital’s strategy is to make long-only investments based on fundamentals and the core principles of value investing.

Listen to the episode

We discuss frens capital's investment strategy and what makes web3 interesting from an investor's point of view. We also break down liquid venture and why is it a superior form of investing compared to traditional VC. We cover the differences between web2 and web3 business models and moats, and speak about some 0-1 tech unlocks that could open up the space for mass adoption.

Tune in for a great discussion about the fundamentals of value investing in crypto.

Timestamps:
00:00 Introduction
04:19 Overview of frens capital
05:36 What do fundamentals mean in crypto?
07:07 The problem that frens capital solves for investors
09:40 Liquid venture vs. traditional venture
12:26 How does frens work with the projects they invest in?
14:00 What makes crypto interesting for investors?
15:33 Web2 vs. Web3 business models & power laws
19:47 Moats in crypto
24:06 Tech unlocks that Chris is excited to see play out
27:15 Market inefficiencies
30:05 Relative valuations
31:07 Deal-sourcing and decision-making
34:35 What metrics does Chris focus on when analyzing projects?
36:02 An investor's point of view on token incentives
38:22 Blur: Developing an investment thesis
42:26 What is Chris most excited about in crypto right now

Product tip of the week

Tips for getting the most out of Token Terminal

We’ve introduced the ability to filter any data table columns. This is especially helpful if you want to exclude data points over or under certain values.

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