How Have DeFi Protocols in Solana Evolved? A Deep Dive with SolanaFM
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The past two years have been momentous for Solana’s DeFi ecosystem with the rise of top projects like Serum Protocol, Raydium Protocol and Mango Markets. With immensely speedy transactions and low fees, Solana may be the frontrunner in expanding into the next stages of DeFi innovation. However, recent exploits and hacks have also sparked insecurities among investors. On that note, ecosystem players have to pull through in order to reinstate the sense of safety and trust in these platforms.
Presently, Solana can count over 70 DeFi protocols with a total value locked (TVL) of $1.98B. Understandably, the current TVL may seem minuscule if weighted against the peak levels of $11.56B in November 2021. Nonetheless, current numbers (August 2022) account for a Year-on-Year (YoY) increase of 51.1% ($1.31B in August 2021), and despite recent market turmoils, serves as a testimony for the continued adoption of DeFi on Solana.
In this report, we will dive deeper into the trajectory that Solana’s DeFi ecosystem has been on so far, zooming into specific protocols launched over this year and the last. This report explores the innovations and use cases of these protocols, as well as conduct a brief comparison of their investment strategies. The later sections will also address some potential developments that we may see in the near future of DeFi. Before that, a quick primer on Decentralized Finance.
A Primer on Decentralized Finance (DeFi)
In essence, Decentralized Finance is designed to give users personal autonomy over their assets and the ways they can deploy their assets. Instead of depending on centralised institutions, DeFi enables a “peer-to-peer” transaction system where users can send and receive funds without a financial middleman (i.e. banks or brokers).
As it stands, Solana’s current DeFi ecosystem hosts an extensive array of protocols that serve various investment strategies and risk appetites. Initial stages of the ecosystem saw the launch of core infrastructures like Automated Market Makers (AMMs) and Decentralized Exchanges (DEXes), which were aimed at enabling traders to easily swap and exchange their assets on-chain. These protocols laid the foundation for additional use cases like Lending/Staking and Yield Farming, where investors could earn stable returns in exchange for the supply of liquidity. For the risk-seekers, several protocols have also taken the leap towards Options and Derivatives which opened the doors to more flexibility and leverage. Additionally, some recent innovations include launch of crypto-backed stablecoins that aim to maximise yield and develop a more self-sustainable DeFi ecosystem.
DeFi Protocols in Solana (2021)
Now that we’ve covered a brief history of the ecosystem, onto the main question — how have DeFi protocols on Solana evolved over the last two years?
The following sections will highlight specific protocols that have made their mark in both 2021 and 2022. We will dive deeper into what use cases these protocols offer, how they are built on top of existing infrastructures and what risks their strategies come along with.
In 2021, we observe that AMMs/DEXes like Raydium took the lead in powering the initial growth of DeFi in Solana. Leveraged Yield Farming (LYF), a nascent innovation at the time, also picked up steady traction with the rise of protocols like Apricot Finance. At their peak in November, Raydium and Apricot held TVLs of $2.11B and $314M, taking up 18.2% and 2.7% of the $11.56B DeFi market cap respectively.
Let’s take a look these protocols in more detail.
Case Study: Raydium Protocol
Launched on February 2021, Raydium Protocol is one of the pioneer AMMs on Solana. Built on top of Serum Protocol’s Central Limit Order Book, the platform allows for a trading experience akin to that of a centralized exchange.
The platform also leverages on Serum’s order book and liquidity to offer a plethora of other use cases including Swaps, Staking and Yield Farming. With a current TVL of $240M, Raydium holds some of the largest liquidity pools in the ecosystem; at the time of writing, the largest pools are the SOL-USDC, RAY-SOL and RAY-USDC pools offering a 10.7%, 4.7% and 6.9% Annual Percentage Rate (APR) respectively.
The extensive list of liquidity pools within the platform, along with Serum’s order book liquidity, enable Raydium to power the swapping of over 1100 tokens (including cross-chain tokens like Ethereum and NFT-based tokens like DUST) on their platform without the need for additional market makers.
Though the farming rates are (relatively) lower compared to other protocols, Raydium’s large TVL figures and underlying infrastructure make the platform a much safer option for the bigger players. On the premise of innovation, Raydium has provided a solid foundation for the next generation of lending/staking platforms like Apricot Finance to build on top of them.
Case Study: Apricot Finance
Launched on October 2021, Apricot Finance is one of the few protocols to offer cross-margin Leveraged Yield Farming, or leveraged farming without owning principal assets. This functionality is made possible with the platform’s in-app swap mechanism built on top of first-gen protocols like Raydium, Orca and Saber. On top of that, the platform holds an available supply of liquidity from its lending pools — at the time of writing, the largest supplied assets on Apricot are USDC, stSOL and BTC with over $6M, $2.3M and $2.2M worth of assets deposited respectively. Along with other assets, Apricot holds a current TVL of over $18M.
In an almost ‘lego-like’ manner, we observe that Apricot’s cross-farming pools are built on top of Raydium and Orca — the aggregated list allows farmers to access the pools from both protocols (and with leverage). Currently, the largest pools are the SOL-USDC (Raydium), SOL-USDT (Raydium) and SOL-UDSC (Orca) pools offering APRs of up to 39.7%, 49.0% and 25.5% respectively (with leverage).
Inherently, certain risks would apply; Apricot’s TVL is relatively lower compared to protocols like Raydium. On top of that, the risk of impermanent loss and potential liquidation is much higher when leverage is engaged. However, the platform offers risk-management mechanisms i.e Apricot Assist to help farmers calculatively prevent these risks. Regardless of risk, Apricot Finance is one of the many cases of ‘second-gen’ protocols taking steps forward in the DeFi ecosystem.
DeFi Protocols in Solana (2022)
We observe that DeFi protocols in 2021 have built a strong foundation on top of order-book mechanisms and lending/farming pools. However, in 2022, we have started to see protocols like Friktion and Hubble Protocol developing unique use cases revolving around options, derivatives and decentralized stablecoins — these could possibly act as new ‘lego blocks’ for the next wave of DeFi apps.
Based on the figure above, Friktion and Hubble Protocol may appear smaller when put side-by-side with the largest protocols in the ecosystem. However, the shift in market share is significant; Friktion and Hubble Protocol currently hold a sizeable TVL of $51.5M and $34.0M respectively, with both protocols taking up 4.2% of overall DeFi TVL. Let us dive deeper into these protocols.
Case Study: Friktion
Launched in late December 2021, Friktion is a portfolio management platform offering various investment strategies i.e. ‘Volts’ that allow for risk-adjusted returns based on market movements. In a unique take for yield farms in Solana, Volt strategies are built on top of option calls, puts and delta-neutral positions which are designed to maximize returns on bull, bear and crab markets.
In a recent release, Friktion officially launched their Portfolio Manager, an interface that displays individual positions along with key metrics and tracking mechanisms. This allows investments to be monitored in a more intuitive manner — a feature highly sought after by institutions, treasuries and whale traders. This portfolio feature could potentially be a catalyst for the shift of even more bigger players into the protocol.
On top of this, Friktion has taken a step in the interplay between the NFT and DeFi ecosystem — their newest Volt #05, focusing on Capital Protection, is exclusive for Genesis Wielders (or holders of the Lightning OG NFT) only.
In this case, we observe that Friktion has innovated across various fronts, opening up the doors to continued developments for DeFi in Solana. In the future, we could possibly see more updates and integrations within Friktion — the addition of more stablecoins like Hubble Protocol’s USDH, for instance.
Case Study: Hubble Protocol
Launched in late January 2021, Hubble Protocol offers borrowing services on their crypto-backed stablecoin, USDH. The stablecoin provides an alternative strategy for traders to leverage their collateral.
With a TVL of over $34M, the protocol allows traders to take an interest-free loan with their own collateral to borrow USDH. Hubble Protocol also offers a unique method to maximize returns — some collateral assets like mSOL, stSOL and daoSOL also earn yield while being deposited on Hubble. The figure below shows the overall distribution of collateral deposits; the assets with the largest deposits at the time of writing are SRM, BTC and mSOL with $20.86M, $2.98M and $2.90M in deposits respectively.
Though the common risks of stablecoin de-pegs still apply, the protocol has developed stability mechanisms to protect the stablecoin from any major market movements. We will dive deeper into USDH and some whale strategies involving USDH in our next report.
What Can We Expect in Future DeFi Protocols?
(Disclaimer: a fairly speculative section.)
With projects like Friktion utilising options and emphasizing the importance of portfolio management, and with projects like Hubble opening doors to increased capital efficiency, we may see future DeFi projects building on top of these use cases. Additionally, in light of the recent exploits involving Crema Finance and Nirvana Finance, there is an inherent need to enhance security across all ecosystems.
The current trajectory sees Solana DeFi protocols unfolding on a path towards increased security and portfolio risk management.
Developments in Security
Over the last month, we have witnessed two events that could have been avoided in the exploit of Nirvana Finance and Crema Finance. In both cases, hackers managed to take advantage of code-level flaws which would have been warded off easily if the code base was examined by a third party. On this note, we would foresee DeFi protocols (both new and existing) taking more steps to battle-test their code either through security audits or making their code base open source.
For instance, protocols like Raydium and Orca have had their relevant smart contracts audited by Kudelski Security, a leading blockchain security auditing firm. Their smart contracts are also open source, allowing third-party developers to contribute by pointing out any potential flaws or suggesting improvements to their code base. Though we have not seen all DeFi protocols putting these deterrent measures into place, it is crucial now more than ever to do so.
Developments in Risk Management
In 2022, we have observed more DeFi protocols offering alternative investment strategies involving options and derivative assets (e.g. Friktion, Zeta Markets, 01 Exchange, etc.) as well as alternative methods to generate yield (e.g. Hubble Protocol, UXD) and open leveraged positions (e.g. Apricot Finance, Tulip Finance, Francium) — with the increased opportunities, comes increased risk as well. There will eventually be a need for DeFi protocols to offer more meaningful insights (particularly involving risk metrics).
As we covered previously, Friktion has taken the first step with the launch of its Portfolio Manager offering historical transactions and position tracking, as well as key metrics like Return on Investment (ROI) and Portfolio Value. For the purpose of speculation, we could also see risk management beyond protocol-level tools in the future — direct wallet alerts (e.g. Phantom notifications) or direct updates on our mobile phones, to name a few.
The Bottom Line
As seen with the cases above, Solana’s DeFi ecosystem has been built with a strong emphasis on composability and innovation. Though builders have executed flawlessly on these fronts, there is still a dire for a more secure and user-friendly infrastructure.
However, at the current trajectory that we are heading towards, it will not be long until we close these gaps and see a much wider retail adoption of DeFi on Solana.
Raydium Protocol: https://raydium.io/
Serum Protocol: https://www.projectserum.com/
Mango Markets: https://mango.markets/
Apricot Finance: https://app.apricot.one/
Apricot X-Farm Pools: https://app.apricot.one/farm
Friktion Portfolio Manager Interface: https://app.friktion.fi/portfolio/Ewwa1U4rvp6ix82zNuFZwv27G1yy3c6uSuoAv1jvmPNR
Hubble Protocol: https://hubbleprotocol.io/
Hubble Protocol Largest Deposits: https://app.hubbleprotocol.io/stats
Crema Finance Exploit Coverage:
Nirvana Finance Exploit Coverage: