Optimism grew faster in terms of total locked value (TVL) than any other top 12 blockchain last month, in part due to increased interest in a five-month DeFi lending protocol.
User deposits into Sonne Finance, a modified version of the Ethereum Compound-based lending protocol, have almost quintupled since mid-February. On Thursday (23), for example, user deposits were just over $150 million. By comparison, the figure was $36 million on Feb. 14, according to data from DeFi Llama.
Sonne from Optimism grows
Now, Sonne is Optimism’s second major protocol. But the protocol owes much of its success to the biggest: Velodrome, a decentralized exchange with which it is deeply intertwined.
Sonne’s success is emblematic of decentralized funding: he and Velodrome are modified copies of other protocols. Thus, its integration was made possible by “composability”. It’s about the notion that open source projects can and should be stacked on top of each other to create complete financial services.
Velodrome was inspired by Solidly, a now-defunct decentralized exchange built by controversial DeFi developer Andre Cronje.
Solidly’s failure last year “kind of scared people off the model for a while,” TokenBrice, Liquity’s pseudonymous head of marketing, tells The Defiant. “Except those guys at Velodrome, who saw the flaw for what it was, an execution flaw, and understood that the model was really interesting.”
Velodrome incentivizes trading fees rather than simply providing liquidity. The protocol does this by first rewarding liquidity providers with VELO tokens.
People who lock VELO tokens can receive two things: income from trading fees and voting rights for direct incentives, denominated in VELO, for certain pools. Other protocols can then “bribe” VELO voters with additional incentives to vote in their liquidity pools. The system is designed to direct liquidity to the most valuable trading pairs.
Sonne leveraged this to drive liquidity into his own token on Velodrome, directing rewards to those who provide liquidity in the SONNE/USDC pool.
“Overall, this is helping them secure a solid liquidity baseline that grows with the project. And at the same time, it’s helping to leverage that liquidity to increase the yield that goes to token investors,” said TokenBrice. “It’s a good way to enjoy the Velodrome.”
But Sonne doesn’t owe all of his recent success to the Velodrome.
Lending giant Aave has deployed a version of its protocol on seven blockchains, including Optimism. Crucially, the lending market it offers for OP, Optimism’s native token, is isolated. That is, depositors cannot borrow OP freely against various types of collateral, according to Ken Eleje, a research analyst at Messari who recently wrote a report on Optimism-based protocols.
“And that really hampered the adoption of the OP token on Aave,” Eleje told The Defiant. “Historically speaking, next to stablecoins, the main protocol token is usually the biggest market we see [em protocolos de empréstimo].”
Additionally, Sonne offers token incentives across all of its own lending pools.
“[Isso] makes Sonne a more attractive protocol for lending than Aave, as Aave doesn’t offer the same, or any incentives, really,” said Eleje. “That marginal yield, even if it just increases your yield by 2, 3, 4%, if you look at a lot of these depositors who tend to be larger accounts, they’re much more likely to be swayed to go to one platform versus another.”
As of Thursday (23), Sonne had US$9 million in OP available for loan. Meanwhile, Aave only had $300,000.
*Translation of the article “New Lending Protocol Boosts Optimism TVL” with permission from The Defiant.
Notice: The text presented in this column does not necessarily reflect the opinion of CriptoFácil.
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