DEVELOPMENT
I open a new series of articles-translations, which will be devoted to interesting reviews on the topic of cryptocurrencies. Advertising blocks and any digressions from the topic will be removed from the articles. Whoever wants to read the original article – the links will be provided.
Let’s start with a breakdown of the zkSync ERA ecosystem.
zkSync ERA
zkSync Era is an L2 scaling solution that offers cheaper and faster transactions than the core Ethereum blockchain (L1). L2 solutions migrate most of the activity from L1 while maintaining its security and completeness.
I wrote in detail about zkSync and why it is a future gem in this post. Read on, it will be interesting!
For a list of all gem projects, see here.
Article: DeFi Degen playbook for the zkSync Era ecosystem
Article authored by IGNAS | DEFI RESEARCH
Date of article is April 9, 2023.
I usually like to focus my posts on counternarratives that are longer term plays like RWAs, DeFi Options or SBTs. The key here is to get ahead of the narrative, not follow it.
The thing about the zkSync Era ecosystem is that it reminds me of the early summer days of DeFi, when new opportunities for farming appear.
We often get carried away by what’s popular and end up making impulsive decisions based on trends. But following popular trends in investing is a sure path to failure. The key to outperforming the market is to get ahead of events, not follow them.
Otherwise, sticking with ETH and BTC is the best long-term strategy…
However, it takes time for counterpropaganda to become dominant, so I include short-term plays to support myself. And zkSync Era turns out to be really interesting.
Why zkSync Era
A week ago, I asked my Twitter followers to choose which zk-based DeFi ecosystem they would invest in to get the maximum potential ROI.
zkSync Era won with 51% of the votes. I would love to write about other ecosystems in the future, though.
Other reasons include:
- zkSync airdrop will happen sooner or later. It’s good to be constantly active in blockchain.
- It has more TVL ($82M) than other zk-based blockchains, and it seems to be growing rapidly.
- Several dApps are running on it, allowing each individual dApp to be evaluated, which is hard to do on large blockchains.
- zkSync Era is the most active in terms of daily active users and has the largest number of shared unique addresses.
This is why zkSync reminds me of the early days of DeFi in 2020: many projects had no tokens (airdrop capabilities) and there were only a few dApps.
Finally, the zkSync DeFi ecosystem is now at a crucial stage, with several DEXs with different tokenization models vying to become the dominant liquidity layer .
A general guide to cryptocurrencies
Cryptocurrencies are currently in PvP* mode. No new money comes into this space, so one person’s profits are taken from another person’s pocket.
* Player(s) versus player(s) or PvP is a variant of interactive conflict between multiple users, taking place in a game world between two or more characters controlled by human players.
In general, new money has to come into the market to pump up BTC; the early holders then move to Ethereum or large capitals. When they grow, the money moves into lower capitalization tokens, and they get pumped up.
What does this have to do with zkSync? This path is happening in the zkSync DeFi ecosystem right now.
It doesn’t matter that new money doesn’t come into the cryptocurrency space.
What matters is that the new money comes into the zkSync Era ecosystem. It grew by 15% in the past 24%. Imagine if there was 15% more fiat money entering the overall crypto ecosystem. That would amount to $184 billion.
zkSync Era Degen Playbook: Phase One
The first thing the newly launched blockchain needs is users who perform transactions and pay commissions for doing so.
To do this, the first phase attracts liquidity through automated market makers (AMMs). AMMs are the backbone of liquidity on the blockchain. They are also simple because they do not require an oracle to operate and are crucial for new dApps that launch their tokens on the blockchain.
This is where the action is now unfolding, which is the focus of much of this article.
In the first phase of the zkSync era, we are witnessing an exciting battle between DEXs for the right to become a layer of liquidity.
It is very interesting how different approaches these DEXs have chosen. One of them will become a layer of liquidity. The right approach could mean big gains.
I’ll share my opinion on each of them, but first take a look at my brief overview of their main features and tokenomics:
S
DEX is currently #1 in TVL.
They describe themselves as a customizable, future-proof DEX with multipool technology for a variety of usage scenarios. It supports various AMM algorithms, capital efficiency and dynamic trading commissions with commission discounts for token stakeholders.
The $SYNC token has not yet launched, but has been announced. The high TVL suggests that insiders are aware of the upcoming release.
Mute.io
Mute is an AMM-based DEX with limit orders, pools of stable and normal AMM curves, variable LP commissions and gas cost savings. It has dynamic liquidity pools for stable and normal assets with adjustable LP commissions.
Mute’s tokenomics are similar to the ve(3,3) model on Velodrome, with their amplifier (to boost MUTE issuance into some pools) and bonds (like Olympus DAO) to create liquidity owned by the protocol.
Mute bonds allow MUTE-ETH liquidity shares to be exchanged for MUTE tokens at a lower price. The Mute DAO gains liquidity by benefiting its treasury. The bonds are issued on a first-come, first-served basis with increasing yields. When purchased, dMute tokens are issued with a 7-day lock, then they can be exchanged for MUTE or re-locked.
Amplifier and bonds have not yet been launched.
The MUTE token was issued a year ago and trades with a market value of $40M!
Velocore
A fork of Velodrome, which is itself a fork of Solidly A. Cronje.
The main thing to understand about Velodrome’s tokenomics is the flywheel effect. You have an incentive to vote for pools to get bribes. Or you can vote for pools with more volume so that LPs get more bribes, which leads to more liquidity in those pools and ultimately reduces slippage.
They just closed their token sale, selling 40% of the total supply for 540 ETH (but the sale was oversubscribed at 8k ETH).
The average selling price of tokens was $0.045 USD. At the time of writing, its price is $0.17 USD.
Space.fi
SpaceFi is a cross-blockchain platform on Evmos and zkSync, with DEX, NFT, Starter and Spacebase as initial products, aimed at connecting the Cosmos and Ethereum Layer2 ecosystems. Deployed on Evmos and zkSync.
There are many more things that make Space.Fi unique, but I won’t go into it as I don’t think it will become a major liquidity hub on the zkSync Era. I’ll explain why in a second.
Tokenomics include xSPACE, a non-transferable management token convertible from SPACE 1:1 with a 30-day non-transfer period (unbonding).
SPACE is fairly inflationary and trades with a market capitalization of $1.5M ($18M FDV).
GemSwap
These are Dex, launchpad, NFT marketplace, and farming platform. Their goal is “to provide a comprehensive and convenient universal platform for the cryptocurrency community.
Their ZGEM farming rewards are divided into 20% unlocked and 80% blocked, which means you have to wait to fully unlock rewards.
ZGEM is trading at $52k and FDV $373.3k.
Degen is guessing the fastest horse (DEX)
I don’t think Space.Fi and GemSwap will be layers of liquidity for zkSync Era:
Space.fi is unique in that it connects different ecosystems, but the DEX liquidity layer should only focus on one ecosystem. Sushi would be king of DEX if more blockchains lead to better token performance.
GemSwap’s tokenomics are a mess. The forced blockchain reward for farming 80% is not attractive, and their farming does not include other zkEVM altcoins. There are other reasons, but I’ll focus on why other DEXs are better bets.
So, which one should we choose? We can learn from other blockchains to find clues.
Every blockchain has a dominant DEX:
Ethereum – Uniswap.
BSC – Pancakeswap.
Arbitrum – Uniswap (but Camelot has done well with low-cap altcoins).
Avalance – TraderJoe
Polygon – Quickswap
Optimism – Velodrome
Fantom – SpookySwap
These DEXs established their dominance early on (with the exception of Camelot). They also tried to expand to other blockchains, but even Pancakeswap has trouble expanding to Ethereum and Uniswap to the BNB blockchain. Thus, a multi-blockchain strategy is difficult for DEX.
I believe Optimism is the closest analogy to what is happening now in the zkSync Era
With $267M in TVL, Velodrome dominates Uniswap ($72M). This is due to the ve(3,3) model, which incentivizes newly issued tokens to buy up veVELO voting tokens.
New tokens are more profitable to pay for pharming liquidity on Velodrome, since projects can spend $1 USD on liquidity worth $3-$4 USD. This is cheaper than incentivizing liquidity with your own token farming fees.
SyncSwap vs Mute vs Velocore
The logic of Mute and Velocore tokenomics is similar to that of Velodrome. Moreover, in Velocore, it is identical.
It’s still unclear what SyncSwap’s tokenomics will look like, but there is speculation that it could resemble ve(3,3) or have a reward system where you can earn tokens by trading certain pairs (similar to liquidity mining).
SyncSwap is a token-less leader as it is expected to airdrop. When that happens, their tokenomics model will work and my strategy will have to adapt. But I have a hunch that Velocore will do better.
Right now, the absolute priority is to get new projects to launch their tokens/liquids on their DEX. The current state of affairs is as follows:
- SyncSwap – Blockchain trading (OT, Onchain trading).
- Mute – Memcoins (zkDoge, WISP, DOF, zkInu).
- Velocore – None.
To be fair, Velocore announced that Multichain’s bridge assets will be launched (and bribed) on Velocore. This is a significant win for Velocore, but Mute is slightly ahead.
All three DEXs have different token release strategies: Mute launched a year ago (but Amplifier/Bonds have yet to launch), SyncSwap has not launched, and Velocore held a token sale with fully functioning tokenomics.
The fact that Velocore is a fully functioning tokenization machine with its tokenomics is a significant advantage. Velocore is also easy to understand: it is a fork of Velodrome, which won DEX games on Optimism.
I believe this Velodrome bet will pay off in zkSync Era as well. The VC token is already 3 times the selling price of a $3.7 million token in 24 hours (compared to $820k for MUTE, $75k for SPACE and $480k for ZGEM).
That could change. If new tokens continue to appear on SyncSwap, I will adjust my strategy accordingly. For now, the priority is to keep an eye on new token listings.
We’ll see how that plays out soon.
Phase Two: Expanding the DeFi Ecosystem
After establishing a dominant DEX that provides a level of liquidity, the next phase involves the development and growth of DeFi’s diverse ecosystem. This includes lending and borrowing platforms, pharming, synthetic assets, stablecoins and insurance platforms.
These new protocols are mostly forks with incremental innovations to the existing DeFi ecosystem on Ethereum or other established blockchains.
The second phase is happening simultaneously, but at the moment with less intensity.
This is a good time for airdrop farming, as most new dApps are tokenless. A few projects that have caught my attention are as follows:
Nexon Finance: Fork from Compound V2, with $1.5M in TVL. A little concerned about oracle-related issues, though.
Orbiter bridge: Easy to use and fast bridge to/from major L2s.
ZKEX: DEX order book. Similar to dYdX due to order matching outside the blockchain. Tested in real time.
Fringe: A lending marketplace similar to Aave, with its own stabelcoin. Potentially risky model, as Platypus USP and previously Venus XVS stablecoins have had problems recently.
There are even zkAnimals NFTs if that’s what you’re into.
You can keep an eye on the official ecosystem website for all the major projects.
My opinion: Don’t marry the bags, but they will give good opportunities for farming. If you see their adoption growing, double it. Cut your losses on dApps that aren’t gaining momentum.
You need to be careful here too: high APYs when lending, trading or selling tokens are risky because zkSync Era is not 100% EVM-equivalent, and dApps need to do proper testing.
Phase three and beyond
This is where the real innovation has to happen. At this point, established dApps like Aave and Curve are starting to overtake phase two fork projects (if they don’t innovate).
Like Arbitrum has GMX, zkSync Era needs at least one killer dApp to develop the DeFi ecosystem.
Identifying this innovation takes time, but catching it early is the ticket to 100x or more.
At this point, it makes sense to airdrop zkSync to further accelerate growth as the initial hype around blockchain slows and competition intensifies.
Conclusion: Stay safe
The initial launch phase is very interesting as we see farming games being played out again on the new blockchain.
But beware. zkSync has already experienced downtime, ETH token sales are stuck in the smart contract, bridges can be hacked, and lending protocols are exploited.
Be careful and remember that this post IS NOT FINANCIAL TIP.
