Boosting Cardano's DeFi

Why is it important?

It's important because Defi dApps provide trustless on-demand access to financial services for global users

What does success look like?

A competitive environment for DeFi on Cardano with an emphasis on cross-collaboration & driving composability across protocols.

Key Metrics to measure

How many DeFi dapps were launched on Cardano mainnet within 3, 6 and 12 months after funding.
How long does each dapp take to be launched.
How many daily active users are the DeFi dapps funded in this cohort attracting.
How much Total Value Locked (TVL) are the funded DeFi dapps able to capture 3, 6 and 12 months after launch.
Number of bugs and vulnerabilities found in each dapp.
Amount of resources lost due to bugs or vulnerabilities.
Number of users participating in testnets.
Number of token holders/unique wallets(when dapp has a token).
Distribution of supply between the team and the community.
Numbers of listed pairs (in case of DEXs).
Number of listed assets (cases of loan+lending dapps, derivatives and synthetic assets).
Number of articles and open source financial models research delivered to the community.

Challenge brief

THIS CHALLENGE INTENDED TO REPLACE "Scale-UP Cardano's DeFi Ecosystem".

The previous challenge(ScaleUP Cardano's DeFi Ecosystem) demonstrated success and allowed popular DeFi projects such as Liqwid Finance, Minswap and ErgoDEX to be funded by the treasury, without the participation of venture capitals and with fair launch models, allowing sustainable distribution of the supply among the community/userbase.

The fact that ERGODEX's proposal was the second best voted proposal in the Left-Over budget is an important indicator to demonstrate the competitiveness of the proposals presented in Fund5.

Currently, the vast majority of DeFi dapps and assets flows occur on the Ethereum blockchain, however due to congestion and increased transaction fees, the use of DeFi is increasingly elitized, leaving out the people who could most benefit from it, the unbanked.

Over the past year several DeFi projects have been moving to more scalable blockchains, such as Binance Smart Chain, Polkadot, Cosmos, Solana, among others. Second layer solutions are also being used as alternatives to Ethereum main chain, Polygon has been a great example.

In this migration and bridges creation scenario, some projects are turning to Cardano to create their DeFi projects.

Cardano is finally delivering smart contracts and that opens a door to a lot of innovation in DeFi. We can offer not only a scalable blockchain, but also a secure blockchain and aggregated governance layer in the near future. This set of characteristics place Cardano in a prominent place and with a good opportunity to gain market share and expand the user base.

With Catalyst, we have the opportunity to fund DeFi projects and allow them to have greater decentralization and resilience, which are essential aspects for DeFi projects. Many projects end up accepting the participation of Venture Capitals due to lack of financial resources. The participation of VCs in DeFi projects usually ends up causing a large part of the supply distribution to be alocated to VCs and this compromises the decentralization and consequently the security of these projects.

The DeFi ecosystem today is taken over by projects full of vulnerabilities, hacks are constant, economic models are copied from other projects, decentralization is no longer a priority and few projects are dedicated to create economic models/bonding curves/algorithms thinking about the users' needs.

It has become clear over the year that bugs, hacks and vulnerabilities are not unique to smart contracts on Ethereum. Dapps running on Binance Smart Chain and Cosmos suffered from vulnerabilities as well.

<https://cointelegraph.com/news/hackers-stole-at-least-600m-in-poly-exploit-across-three-chains>

<https://www.theblockcrypto.com/post/111660/thorchain-suffers-5-million-exploit-developers-have-put-out-a-fix>

Cardano arrives to change this paradigm and bring security to users.

Privacy and resistance to censorship are also important but often overlooked in favor of subsidizing (yield farming). How to encourage DeFi projects to seek resilience, safety, research-based economic models and critical thinking?

POTENTIAL DIRECTIONS

DEXs
Oracles
Algorithmic stable coins
Borrowing/Lending dapps
Derivatives
Research for open source new financial models (bonding curves)

RATIONAL FOR BUDGET DISTRIBUTION

To encourage greater diversity of funded teams and proposals each team can request up to 20% of the total $500,000 USD budget or $100,000 USD.

E.g.

Team A with 2 proposals of $50,000 USD
Team B with 1 proposal of $100,000 USD
Team C with 1 proposal of $80,000 USD + 1 proposal of $20,000 US

t is important to note that 20% is the maximum amount of aggregated budget that the same team can request in this challenge, but any amount below that can be requested. This means that the challenge will have space for at least 5 proposals from different teams, which guarantees greater chances for teams with less popularity and that may be overshadowed by more popular teams in the community.

RATIONAL FOR BUDGET EXPANSION

The 500,000 USD budget has been set so that it can accommodate the demand seen in previous Funds for DeFi-related proposals in the "Scale-UP Cardano's DeFi Ecosystem" and "Dapps & Integrations" challenges.

DeFi projects tend to involve higher costs than conventional dapps due to the nature of DeFi dapps requiring high levels of assurances, after all they are mission critical applications and the smart contracts of these dApps will guarantee the safety of users and large amounts of money.

These development costs puts pressure on teams to break the budget needed into different proposals across multiple Funds. On one hand, budget fragmentation allows the community to assess performance before committing to allocate a large amount of funds, but on the other hand the need to create proposals in consecutive Funds creates friction for the proposers and increases the workload of CAs across multiple Funds. Another negative aspect is that budget fragmentation ends up damming (like water in a dam) the need for funding and causing proposals to actually end up being funded for development that has already been completed, which is a barrier to innovation.

Looking at the data associated with proposals related to DeFi in Fund5, I noticed that some proposals were submitted in the "Dapps & Integrations" challenge. There are some reasons that may justify these proposers choices, such as lack of knowledge about the specific challenge for DeFi (Scale UP Cardano's DeFi Ecosystem) or the preference for competing in another challenge that could be less competitive, which would also be a problem since the challenge of "Dapps & Integrations" has been extremely competitive in the last Funds. Below is an image (Image 2) to illustrate the number of approved proposals and proposals that did not receive funding on the Dapps & Integrations Challenge.

The creation of this challenge(Boosting Cardano's DeFi) can also relieve the pressure for competition in the Dapps & Integrations challenge and make room for dapps that have other use cases besides DeFi.

To bring more data to my arguments, I created a chart (Image 3) aggregating the DeFi proposals that were in the "Scale UP Cardano's DeFi Ecosystem" and "Dapps & Integrations" challenges. The intention is to demonstrate the demand for dapps directly related to DeFi.

When looking at the DeFi-related proposals that have been approved but not funded, we can see that there are 5 (1 funded by left-over funds , 3 in the Dapps & Integration challenge, and the last in the "Scale Up Cardano's DeFi Ecosystem" challenge). These 5 proposals added together requested around $260,000USD.

In the image 4 it is possible to see several dapp projects related to DeFi that are being developed on Cardano (DEXs, Lending+Borrowing, Stable Coins, Synthetic Assets, Oracles, Derivatives and Insurance)

bookmarked!