The Cardano DeFi ecosystem is finally starting to take off. Sure we’ve had a few DEXEs launch, but until Vasil it’s fair to say Cardano wasn’t yet ready for DeFi. This is no longer the case. With Vasil in the rear view mirror we are seeing major DeFi projects move towards mainnet.
The first of this new wave of launches was Indigo Protocol who launched in November. Looking ahead we expect to see Liqwid Finance, GeniusYield, Meld, and Axo all due to launch over the next couple of months (as best as I can ascertain from public statements).
Launching during a bull run and attracting liquidity is hard enough. Launching during a bear market and a post-FTX crash is difficulty cranked up to God mode.
In this article I take a look what liquidity incentive programs are, what other chains have done, the effect they have had on TVL, and why I think the Cardano Foundation needs to step up with some liquidity incentive programs of their own in order to help give the birth of DeFi on Cardano a successful launch.
What are liquidity incentive programs?
In short they are the distribution of of funds in return for engagement with an ecosystem. The aim is to attract traders / liquidity providers (I use these terms interchangeably) onto a new platform. This is particularly important when such a move requires learning to set up and new wallets that people may not be familiar with. The goal is to give away short term value for longer term gain by making users feel at home on a new platform. Of course you want to retain these new users too, and this is not necessarily guaranteed.
Let’s take a look at how liquidity incentive programs have worked on Avalanche, and Algorand.
Avalanche launched the Avalanche Rush program in August of 2021 to coincide with the launch of DeFi on Avalanche. Since then they have had two subsequent phases to it as seen in the TVL chart below.
Now despite the fact that TVL is a flawed metric it is still a good measure proxy for the strength of a DeFi ecosystem. What we see from this chart is that TVL got a short-term boost for a couple of months as soon as Phases I and II were launched. This is most pronounced in the first phase where Avalanche was going from a non existent DeFi ecosystem to a an $11bn one (in today’s value) in just a matter of months. After this it seems normal market conditions prevailed with a slower move upwards until the end of March when they moved one of their biggest games, DeFi kingdoms, onto a separate subnet.
To help offset the dip in main chain TVL this brought about they launched Phase II, and we see an immediate positive bounce in TVL. Again the benefit lasted for a few months before normal market conditions, in this case the Terra-Luna collapse in May, took over. More recently they launched Phase III of the program in September, to try and offset the onset of the bear market we currently find ourselves in, and for a very short while things looked steady before FTX imploded and brought the whole market down.
But what exactly was Avalanche Rush? Let’s take a closer look
Avalanche Rush Phase 1
The Avalanche Foundation provided up to $180m of AVAX tokens to boost the yield users would get for using projects built on Avalanche.
“The Avalanche Foundation has announced Avalanche Rush, a $180M liquidity mining incentive program to introduce more applications and assets to its growing DeFi ecosystem. Avalanche Rush will bring Aave and Curve, two of the largest DeFi protocols by total value locked (TVL), to launch on Avalanche. Phase 1 of the Rush program will launch soon and provide the Avalanche native token, AVAX, as liquidity mining incentives for Aave and Curve users over a 3 month period. The Avalanche Foundation has allocated up to $20M AVAX for Aave users and $7M AVAX for Curve users” (Source: Avalanche Foundation Blog post)
After Aave and Curve, the Foundation went on to provide incentives for BENQI, Sushi, Yay Games, Paraswap, Pangolin, Paraswap, Kyber Networks, Trader Joe, PeFi, Alpha Finance Lab, and UST, who all joined the Avalanche network in that initial 6 month period.
Here is a quote from BENQI
“The first phase has been a resounding success for the Avalanche ecosystem broadly, and BENQI’s lending market specifically. The protocol has garnered a peak of $2.8 billion in supplied value, over $1 billion in borrows, with close to 14,000 total users.”
Avalanche Rush Phase 2
The second and third phase followed a similar vein but focused on providing additional liquidity to Kyber Network (not sure why they were singled out)
The Algorand Foundation launched the Viridis DeFi fund in September 2021. The total value of the fund is a whopping $300m USD fund though it wasn’t all deployed at once.
Algorand only launched their smart contract capability in September of last year, a week or so after Cardano launched its smart contract capability. The difference in TVL between the has been stark with Algorand growing steadily month on month.
Viridis Phase I
Initially $10m was deployed in October and focused on bringing builders to the chain:
“The $5M Price Oracle SupaGrant will seek proposals for the integration of oracle networks with associated price feeds. Applications can be made through our Price Oracle SupaGrant portal.
The $5M Bridge SupaGrant will be a call for proposals to build bi-directional bridges from Ethereum and other chains. Once ported to Algorand, DApps need access to market data to manage a variety of smart contract functions. Applications can be made through our Bridge SupaGrant portal.”
This was necessary for Algorand as its smart contract platform isn’t just a replica of EVM as Avalanche’s is, so there was a need to fund the development and get two of the three most critical pieces of DeFi infrastructure, Oracles and Bridges, up and running on Algorand (the third critical infrastructure in case you are wondering are stablecoins).
For Cardano, the fact there isn’t an established Oracle yet on Cardano ought to be a concern, but that’s a topic for another post.
Further deployment of capital came in Dec 2021, with Phase II of the Viridis fund. This focused on bootstrapping liquidity for recently launched DEX and Lending & Borrowing DeFi protocols.
“Starting soon, users of Algomint and Tinyman will be able to take advantage of Algo rewards by bridging assets and then staking them in select liquidity pools. Later in December, borrowers and lenders on Algofi will be similarly rewarded for providing borrow supply and maintaining solid loan utilization on the protocol.”
Pretty soon after, TVL rose steadily, month on month till, surpassing Cardano along the way, and continued going strong halted briefly only by the the FTX collapse in October. However it would be disingenuous of me to say this was all due to the incentives – I suspect the effect of that only lasted 3-4 months like we saw for Avalanche.
In April they also launched their governance program which had the effect of taking Algo off self-custody wallets (and hence not counted to TVL) and into third-party contracts on which they could earn extra yield in addition to the governance rewards (self custody whilst getting governance rewards is still possible though). For me this is cheating a little but explains why Algorand TVL managed to weather the Terra-Luna crash that impacted Avalanche.
A bit later on the Arrington Capital Fund was launched.
“The Arrington Algo Growth Fund (AAGF) aims to encourage and spur additional development on Algorand, which has seen significant growth and adoption recently across DeFi (decentralized finance), traditional finance, the public sector, NFT space and more.
AAGF will invest in Algorand-focused projects, including liquid and illiquid coins, to empower projects that are creating new financial applications in the Algorand ecosystem”
This is in addition to other smaller grants that are mentioned in the same article:
“The launch of AAGF comes on the heels of consistent funds that have been created to support Algorand-based initiatives, including accelerators across Asia and Europe:
- $25m fund in Miami
- $400m fund from Borderless Capital
- $10m fund for NFTs, and
- $250m grant program from the Algorand Foundation
In total, more than half a billion dollars in investment has come from various groups who align with Algorand’s long-term vision for the Future of Finance. “
(The $250m mentioned here I assume refers to the aforementioned Viridis program)
So Algorand took a different approach, by incentivizing development as well as liquidity.
If we compare Cardano, Algorand, and Avalanche TVL as it stands today we see that Avalanche is the largest of the three.
The AAVE protocol has been a huge win for the Avalanche ecosystem, followed by Benqi. I haven’t looked into them more closely to see if I can uncover what exactly is driving their TVL.
For Algorand I do know that AlgoFi, Folks finance, Lofty, and Tinyman is where the value from the governance program I mentioned earlier has accrued. So it’s hard to tell what their TVL would have looked like without this.
Ok I’ve focused a lot on TVL here, simply because it was the easiest one for me to work with. But that is not the only metric. Other metrics such as # of new wallets, volume, and transaction count should also be considered. If you wish to look into those then I suggest starting here and here. A quick glance at Algorand metrics show me sudden spikes in activity that may coincide with incentive programs but it would require more research to see how closely they align. And then of course there’s intangible value such as publicity and investor sentiment which are harder to measure but just as important.
So what does this all mean for Cardano? Despite launching its smart contract platform over a year ago, it has struggled to gain traction in the DeFi space. Much of this has been due to the fact that while it was smart contract capable, it wasn’t smart contract suitable, as witnessed with the launch of Sundaeswap earlier this year. With the implementation of Vasil in Sept 2022 however, the chain is not more than capable of handling DeFi workloads and there is an all-star line up of DApps about to launch in the coming months.
But launching in a post-FTX bear market is tough with liquidity hard to come by.
We saw from Avalanche that liquidity incentive programs work best when markets are calm. If we feel the bottom of the bear market has been reached, and there is some evidence to suggest this might be the case, then the next few months might be provide a good opportunity.
Which is I why I’m arguing that either the Cardano Foundation, or possibly Emurgo (or both!) should tap into their sizeable funds to launch similar incentive programs on Cardano, giving a newly emerging Cardano DeFi ecosystem a shot in the arm and bringing new users and publicity to the platforms. The incentive program should focus on yield, as dirty as that word might be in people’s minds right now, as that is what drives uers to the platform. It should include a number of DApps that meet certain criteria such as audited source code, and doxed founders. And there should be a marketing campaign to go with it to alert users of other ecosystems. SPOs and social media influencers can help out too if there was a coordinated campaign to get behind.
Indigo Protocol, Liqwid Finance, GeniusYield, Meld, Axo could all benefit from such a program. So too could others such as Minswap, Sundaeswap and WingRiders. (Funds could be distributed to these based on their current market share)
Regardless of whether you agree or disagree with me, hopefully you agree that next 3-6 months is a crucial time for the successful launch of DeFi on Cardano. I have no doubt that the quality of the projects launching will generate organic growth, but organic growth on top of bootstrapped liquidity is so much better.