DeFi Research News January 2022

CFTC comes after Polymarket (Regulation) 

Polymarket is a decentralized prediction market built on Ethereum that allows users to bet on whether a particular event may occur in the future using binary options. The US Commodities Futures Trading Commission deemed their binary options contracts  as swaps and claimed it was offering these markets without the necessary licensing required by the Commodity Exchange Act.

Polymarket settled this investigation by The U.S. Commodity Futures Trading Commission (CFTC) by paying a $1.4M penalty and removing all unauthorized markets on the platform before January 14th. The CFTC announced that Polymarket received a significantly reduced monetary penalty due to the company’s “substantial cooperation” during the investigation.

CFTC Acting Director of Enforcement, Vincent McGonagle, said in a statement that, “All derivatives markets must operate within the bounds of the law regardless of the technology used, and particularly including those in the so-called decentralized finance or ‘DeFi’ space, market participants should proactively engage with the CFTC.”

AAVE Officially Launches Arc Institutional DeFi Product (rDeFi) 

AAVE Arc, the institution-specific version of the market leading decentralized AAVE lending protocol, officially launched this past month and was able to onboard a total of thirty institutions to their platform. 

The Arc protocol adds an additional smart contract layer to the existing AAVE v2 protocol, which restricts usage to specific organizations that have been granted permission to use the network. This protocol was designed specifically for firms that want to access the world of DeFi but couldn’t previously due to regulatory and compliance guidelines. 

The institutions, which were required to go through a strict regulatory KYC (Know Your Customer) process via whitelisting partner Fireblocks, include the market maker Wintermute, the digital asset manager Galaxy Digital, and the crypto investment fund CoinShares. 

Whitelisters are responsible for ensuring the institutions follow KYC  and anti-money laundering compliance rules. Securitize, a New York based digital asset broker, and SEBA, a Swiss digital asset bank, have been approved as additional whitelisters for the Arc protocol and hope to help onboard dozens of new institutions to the world of DeFi this year. 

Yearn governance votes for new tokenomic model that will reward token stakers with a fraction of protocol revenue (Governance changing tokenomic models)

Yield aggregator Yearn Finance’s governance vote to change its tokenomics structure has almost unanimously passed. Once implemented later this year, addresses holding YFI tokens staked in their governance process will be able to earn additional YFI tokens as a reward. 

Yearn will use generated protocol profits  to purchase more YFI tokens off the open market and distribute them back to stakers, all while maintaining their fixed $30M operational fund. 

This new Yearn tokenomics model follows the lead of stablecoin-focused AMM (automated market maker) Curve Finance, which incentivizes the reduction of liquid token supply on the open market and fosters long term price appreciation as a result. DeFi governance tokens have struggled to hold their value the past few months, even as DeFi usage has skyrocketed.

Frog Nation Attempts To Take Control of Sushiswap’s Messy Governance But Bails Last Minute (Governance Conflict in Established DeFi Protocol) 

The Frog Nation, a collective of crypto protocols meant to work together across multiple chains, has added SushiSwap to its ranks. In a blog post from Frog Nation lead Daniele Sesta, it seemed that the team behind protocols, such as Abracadabra and Wonderland, wanted to take over top level management at SushiSwap. 

“As a first note, Frog Nation is here to clean up and bring efficiency back into Sushi, prior to the last 3-4 months LOTs of products were being shipped, Sushi proved that it was not simply just a Uni Fork,” Sesta wrote. 

SushiSwap was originally governed by a multisig, and protocol developers 0xMaki and Joseph DeLong arose as the defacto leaders of the project. Yearn Finance announced in late 2020 that it would merge with SushiSwap, though no details were publicly announced on what that implied. Notably, Yearn Finance’s founder, Andre Cronje, has been collaborating with Sesta on a new DEX (decentralized exchange) on the Fantom blockchain.  

Recently, both 0xMaki and DeLong suddenly left SushiSwap management due to poor team culture. Frog Nation, the newly formed collective from Daniele Sestagalli and his allies, trying to take over the protocol appeared to be a way for SushiSwap to gain a proven management team amidst the chaos.   

Frog Nation failed to successfully take over as the new management, as there was still significant infighting going on behind the scenes, including DeLong losing admin access to the protocol’s Discord server. As a result, scammers could openly run social engineering campaigns against the less sophisticated SushiSwap users right out in the open, where no one currently has the power to ban these people.

Frog Nation announced on Twitter late last month that they will no longer be working on SushiSwap. This is definitely a situation that Coinchange will keep an eye on, as SushiSwap is one of the major protocols in the DeFi space.  

Growth of Fantom ecosystem and Andre’s Solidly Protocol (DeFi Trends)

Fantom was one of the countless forgotten layer 1 smart contract and ETH competitor platforms from the 2018 crypto bear market. However, the value proposition of the network was strong due to its DAG structure and EVM (Ethereum Virtual Machine) compatibility. Andre Cronje, the aforementioned founder of Yearn Finance and one of the most infamous developers in the DeFi space, was drawn to Fantom’s benefits and integrated both Yearn Finance and his Iron Bank protocol to work on the Fantom blockchain in late 2021, leading to an explosion in TVL (Total Value Locked) on the protocol. 

In October 2021, Fantom launched its programmatic incentive reward program, which coupled with the above two protocol integrations, skyrocketing Fantom to $9B TVL. 

Andre mysteriously announced an upcoming protocol in early January 2022, later revealed to be called Solidly, which incentivized liquidity providers to allocate capital to protocols built on the Fantom blockchain. The top 20 protocols by TVL built on FTM were awarded veNFT tokens during a predetermined snapshot time in late January. Andre explains, “These projects with the veNFT’s will own 25% of the protocol in perpetuity, this % will remain fixed, as can be reviewed in ve-distribution.”

The above led to Fantom briefly reaching number 3 in TVL among all protocols in the DeFi ecosystem, according to DeFiLlama.