AH DEFIning DOT! (August 11th to August 17th)

What is up, my friends!

This past week, Wrapped Bitcoin (WBTC) caused quite a stir. As reported by various industry media outlets and crypto Twitter, there were concerns with its new custody management structure.

The new structure involves a joint venture partnership associated with Justin Sun. Given his recent controversy with TUSD and the alleged misappropriation of assets to his HTX exchange, MakerDAO and Aave have planned to limit their exposure. In fact, MakerDAO has already approved an executive proposal to halt all new borrowing of WBTC.

WBTC is a tokenized version of Bitcoin on the Ethereum Network and has established itself as being the top form of BTC used in DeFi. Through tokenization, BTC can function similarly to stablecoins such as USDT. Both can be assets issued on blockchain networks and become usable within those ecosystems.

When it comes to issuing assets on Polkadot, the Asset Hub (formerly Statemint) serves as a generic assets chain for fungible and non fungible tokens. While WBTC would be recognized as a bridged asset, stablecoins such as USDT can be minted, burned, and issued on the Asset Hub. Furthermore, it enables cross-chain transfers of assets via XCM to parachains to be tracked and accounted for.

Our top story this week covers the recent chatter surrounding the Asset Hub, along with other important news items. In particular, there has been a notion that the Asset Hub should be the sole destination for Polkadot DeFi, building on the concept of The Plaza.

With Polkadot DeFi in the spotlight, we will also take the opportunity to roundup the latest Polkadot ecosystem’s DeFi developments in our featured update.

Finally, we would like to welcome Ajuna as our latest Treasury Partner. We recently featured them in a story in our newsletter. Keep your eyes peeled as there will soon be bounties where you can earn some Ajun token.

Time to move on to this week’s DeFining stories and the news updates from our Finders Program.

Dodow, Chief Editor

Top Story of the Week - DOT System Chain

Written by yay.oi

What’s good, commoners? You may remember we reported on Rob Habermeier’s Polkadot Plaza idea back in June. He proposed to add a lot more functionality to the Polkadot Asset Hub by integrating Rust and EVM smart contracts, bridging pallets, and staking.

The idea was met with excitement, and with the passing of Referendum 885, the wheels are in motion at Parity to have the essentials for EVM compatible dApp building on Polkadot by the end of the year. As for the steps to fulfill the rest of Rob’s vision, the road ahead looks bumpy. Referendum 903 for Plaza Smart Contract Tooling failed, and some new ideas for the Asset Hub have resulted in heated debate.

This week, Colorful Notion made a bold statement that the majority of DeFi needs to move on to Asset Hub. Their reasoning is that they feel that parachains are too small, and the average DeFi investor would rather interact with Polkadot, a well-established brand with proven security. We’ll revisit this debate later, but first, let’s take a look at the current state of Polkadot System Chains and some of the obstacles that would need to be overcome.

System Chains are an evolution of the earlier concept known as Common Good Parachains. The original idea was that Common Good Parachains were dedicated parachains that provided overall benefit to the Polkadot network, while also freeing up blockspace by offloading protocol functions from the Relay Chain. It was decided that the term System Chain is a better reflection of their role as essential infrastructure.

Unlike regular parachains, System Chains are governed directly by Polkadot’s on-chain governance and rely on the native DOT token for transaction fees. Their slots are not allocated through auctions, but are granted continuous operation through governance decisions.

Asset Hub was one of the first System Chains. It was designed for the creation, transfer, and management of assets, including both fungible tokens and NFTs, across the Polkadot ecosystem.

Other System Chains currently in use include the Bridge Hub, Collectives Chain, and People Chain. The Bridge Hub hosts the protocols and security infrastructure used for transfers between Polkadot and external blockchains. Currently, this includes the Polkadot<>Kusama and Polkadot<>Ethereum (Snowbridge) bridges.

The Collectives Chain hosts on-chain collectives such as the Technical Fellowship, Polkadot Alliance, and Ambassador Program. It acts as a centralized platform where these groups can assemble, coordinate, and govern. Finally, the People Chain is one of the newest System Chains designed as a centralized registry of on-chain identities.

On Asset Hub, there are sufficient and non-sufficient assets. In order to hold or receive a non-sufficient asset in your wallet, you will need to hold the minimum Existential Deposit (ED) in DOT (0.01). A sufficient asset, however, does not require a DOT ED. Currently the sufficient assets on Asset Hub are DOT and the industry centralized stablecoins USDC and USDT.

As Asset Hub is often the first port of call for on-boarded assets, EDs have been seen as a potential point of confusion for new users. Thankfully, this year, some measures have been taken to reduce EDs. For instance, Pull Request 131 lowered the Asset Hub DOT ED to 0.01, and OpenGov Referendum 857 reduced the EDs for USDC and USDT to 0.01c.

That said, if Asset Hub is to be the default Polkadot userspace for new users, there is still a lot of work left to do. Recently, some UIs for Asset Hub swaps have popped up, such as Kheopswap and Dotswap. Upon using these new solutions, it’s quite plain to see that the Asset Hub completely lacks liquidity. Anything more than the smallest swap results in unacceptable levels of price impact.

While Asset Hub struggles with liquidity, protocols such as Moonbeam have capitalized on their EVM compatibility to more easily bridge liquidity through Multichain, Wormhole, and Axelar. This allows an influx of high-value, established wrapped assets such as WETH and WBTC to provide greater liquidity depth, which is soon to be enhanced even more with the registration of Snowbridge assets.

Of course, Asset Hub has already registered Snowbridge assets, but they lack liquidity. SinceAsset Hub liquidity pools, by design, do not offer any liquidity incentives, the average user is unlikely to contribute to them.

Another pain point comes from insufficient communication between Parity and the parachains regarding Asset Hub issues and use cases. Documentation is lacking, and the SDKs provided by Parity don’t always work as expected. Just this week, the launch Hydration’s No Fun on Polkadot Memepad was held up just before launch after they discovered a limit of 64 registered assets for parachains.

While Basti saved the day this time and found a solution that could be used before a runtime upgrade fix, these kinds of problems seem to be an ongoing frustration for parachain teams. Some suggest that communications could be improved if there were a dedicated Product team at Parity.

Communication channels between parachains and system chains saw plenty of improvements this week. In preparation for the launch of Coretime on Polkadot, opening HRMP channels between parachains and System chains is now permissionless, and possible without going through governance.

We also have ecosystem agents such as Spazcoin, who are on a mission to connect the parachains through governance. This week alone, he initiated parachain referenda to open 27 XCM channels.

Meanwhile, Polimec has unveiled its plans to improve its decentralized fundraising process. The funding cycle will be reduced to 21 days, and the funding target threshold for automatic funding acceptance and evaluator rewards will be lowered to 33%.

Perhaps unsurprisingly, Colorful Notion’s idea to move the majority of Polkadot DeFi was met with a lot of resistance from the parachain teams. Hydration’s Greg Jakub suggested that Colorful Notion stay in their lane and focus on data analytics. He criticizes the post as short-sighted and argues that it fails to acknowledge the immense amount of work that projects such as Hydration, Bifrost, and Interlay have put in to get Polkadot ecosystem DeFi and liquidity to where it is today.

Lurpis asserts that redeploying Bifrost onto Asset Hub is unfeasible, as only parachains can provide the asset sovereignty and governance they require. He also is of the opinion that it’s important to recognize the distinction between the infrastructure and application layers of Polkadot, and that they should complement each other for the benefit of the entire ecosystem.

The DeFi Guy sees Colorful Notion’s idea as a pointless exercise. He claims professionals in the DeFi space care far more about the underlying smart contract technology than the chain they’re on. Furthermore, replicating existing DeFi solutions on Asset Hub, is not enough to result in any substantial growth. What’s needed is innovation.

There is some sense in Colorful Notion’s plan to capitalize on the Polkadot brand, especially on the back of new product launches such as Polkadot Pay. However, their language and ideas at this point seem unnecessarily divisive.

Charged wording such as parachains are basically expendable, triggered more than a few people and may have hindered constructive dialogue with key stakeholders. Polkadot is an ecosystem and a community, and Polkadot Plaza is a welcome addition with plenty of room to innovate and grow, even more so as ecosystem partner rather than competitor.

Featured Update - DOT DeFiing Roundup

Written by Sanchez & Dodow

Decentralized Finance (DeFi) is essentially about eliminating centralized intermediaries that provide financial applications and services, using blockchain networks. It embraces the Web3 vision of a more open, transparent, and fair internet where people have greater control and ownership.

To date, DeFi has become one of the most compelling areas of Web3 adoption, offering a plethora of financial services, including asset exchange, lending, borrowing, yield farming, derivatives, payments and remittance, and much more. Recent advancements have centered around liquid staking tokens (LST), unlocking more flexibility and liquidity to users.

While a single application or protocol can offer various financial services, a thriving DeFi ecosystem comprising multiple interconnected protocols and applications is potentially crucial for realizing the full potential of DeFi. It is the sum of many parts that creates a robust, integrated environment, which further enhances functionality and innovation.

Polkadot is a foundational meta-protocol that can enable the development of a powerful DeFi ecosystem. Its inherent modular development framework and cross-chain capability can provide many possibilities for builders. Let’s take a deeper look into the various parts that have been built and provide an update on their latest developments.

The most basic element of any DeFi ecosystem is a medium for exchange. While there are several DEXs on Polkadot, this diversity is beneficial as it fosters competition and helps ensure various user needs are met. Currently, Hydration is the leading DEX on Polkadot in terms of TVL and offers an effective approach with its omnipool to address liquidity fragmentation.

Hydration has been busy evolving their platform, for more details you can read the report we did in our previous newsletter. Since the start of summer they have kicked off a big campaign to incentivise Polkadot’s DeFi ecosystem. The campaign helps the unification of parachains as you can use multiple assets from leading parachains to attain some juicy yields.

While we are expecting a money market and a new stablecoin on Hydration soon, the team continues with token listings. Recent integrations include MYTH, the token of the Mythos chain, vASTR from Bifrost, ACA and LDOT from Acala. Additionally, this past week they released a memepad, allowing anyone to launch a memecoin in less than 2 minutes. The memepad has already seen tokens created by Polkadot engineer Bastian Kocher and Bifrost founder Lurpis.

As Hydration moves into new territory, Acala, who were once considered the epicenter of Polkadot’s DeFi ecosystem have been recovering from the unfortunate demise of AUSD (which was once thought to become the decentralized stablecoin that would unify the entire ecosystem).

Acala’s approach seems to be to explore different and broader use cases. For instance, they recently opened a boosted liquid staking pool for jito-Sol, bringing over $1 million worth of jito-Sol to Polkadot, through the Wormhole bridge. This week, they announced a partnership with Kylix, a new lending platform that received a decentralized futures grant. So far, it is known that Acala's LDOT will be utilized in a new innovative lending product.

As LDOT explores new possibilities, Bifrost’s vDOT continues to be the top LST on Polkadot in terms of adoption. Bifrost offers LSTs for several chains, currently supporting 8 chains with a TVL of $68M. This makes them a compelling omni-chain liquid staking protocol within Web3.

Earlier we mentioned that recent Web3 DeFi developments have increasingly revolved around LSTs. Bifrost is well-positioned due to their track record with partnerships and their ongoing developments with their LSTs. For example, both vDOT and vKSM currently support OpenGov voting, and the accessibility of vDOT throughout Polkadot is currently unmatched.

Overall, Bifrost has become a significant enabler of the DeFi ecosystem on Polkadot. Recently, Zenlink, recognized as an OG multichain DEX on Polkadot and Kusama, launched Eden, which utilizes vTokens from Bifrost. Eden is a Pendle fork on the Moonbeam Network, enabling users to utilize advanced yield strategies to boost their returns.

The ongoing success of Bifrost has led them to release a proposal for new BNC tokenomics this week. These new tokenomics are intended to provide more value for BNC token holders and culminates with the protocol sharing its expected $1.5 million annual revenue with them. Bifrost 2.0 also involves moving the BNC token staking mechanics from Kusama to Polkadot.

We covered Moonbeam and its approach to bringing value through simplicity via the Ethereum Virtual Machine (EVM) back in May. So it comes as no surprise that several successful DeFi protocols have been built on Moonbeam, including Moonwell for lending, Stellaswap for AMA, Beamswap for perpetuals, and more.

Moonbeam recently launched their Moonrise campaign, with points now live. The campaign also engages their DeFi protocols, allowing users to participate by performing simple off-chain and on-chain tasks to earn points, which can eventually lead to rewards.

One exciting new way to earn points is through Stellaswap’s Cowcentrated Liquidity, managed via Beefy Finance. This approach aligns with Moonbeam’s mantra of simplicity by allowing users to contribute to pools, which are then managed through auto compounding vaults.

For budding traders, an orderbook might be the preferred method to manage positions based on chart analysis. Polkadex is an application chain that offers the functionality of an orderbook DEX. They are moving towards removing their sudo keys, which will transfer complete control of the parachain to token holders. Furthermore, Polkadex has announced a liquidity mining program to bolster liquidity.

In the broader DeFi ecosystem, payments and remittance play a crucial role. Pendulum meets this need by connecting fiat rails with DeFi, facilitating seamless integration of fiat currencies. They just announced the opportunity of early access to their Forex-optimized DEX, designed to facilitate smooth onramps and offramps for currency conversions. Vortex, their non-custodial solution, charges an industry competitive fee of less than 0.5% for offramps.

Additionally, Pendulum, via their Spacewalk bridge, effectively connects the Stellar ecosystem with Polkadot, opening the door for stablecoins from Stellar to access Defi opportunities on Polkadot.

On the topic of bridges, they have become essential for growing liquidity and attracting users to DeFi ecosystems. The Polkadot-Kusama bridge has the potential to unlock liquidity between the networks and sista chains. In particular, parachains like Bifrost and Phala, which have adopted a single token for both canary and primary implementations, this bridge could offer greater flexibility and help alleviate potential liquidity bottlenecks.

Other bridges, such as Snowbridge and Hyperbridge, are anticipated to bring in even more liquidity into Polkadot over time as they offer trustless bridging from more established DeFi ecosystems.

Wrapping up, it’s important to recognize that a DeFi ecosystem is the sum of many parts. From our roundup, it’s clear that Polkadot has a strong community of builders contributing to it. The trustless cross-chain communication of parachains using XCM enables developers to create products that can access functionalities and liquidity from multiple chains to serve users.

Furthermore, having application-specific chains on Polkadot enables the development of products that fully focus on a specific service. It also allows tweaking parts to ensure maximum efficiency.

Perhaps the bigger challenge is growing the number of users, which is no different to any other DeFi ecosystem. Metrics such as TVL can be misleading, and as recently reported by Crane on the Kusamarian, it’s essential to consider the quality of the TVL. In particular, 2024 has seen DeFi ecosystems being built on the foundation of airdrop farming. While this doesn’t necessarily impact certain individual protocols, surely it's not sustainable in the long run.

News from the Finders Program Part 1

Written by yay.oi

• In preparation for the launch of Coretime on Polkadot, opening HRMP channels between parachains and System Chains is now permissionless, and possible without going through governance.
• Despite some chatter that Agile Coretime would go live on Polkadot in August, according to Radha from Web3 Foundation, we should expect the runtime upgrade referendum by the end of August and Coretime live in September.
• Decentralized Futures grant recipients MLabs have been tasked with providing the formal verification of GRANDPA, using mathematical proofs to ensure the security and reliability of the protocol.
• Hydration’s No Fun on Polkadot memepad launch was briefly held up while they worked out how to bypass a previously undiscovered 64 asset limit for registering assets from Asset Hub.
• Health-tech DePIN Synapx will use Peaq infrafructure to collect anonymized real-time health data from wearable technology and monetize it on their physiological data marketplace.
• Making inroads into Asia, Nova Wallet now supports Korean and Vietnamese.
• Crust announces a series of optimizations to increase computational efficiency and reduce the computational burden of processing file storage power, resulting in a more resilient and scalable network.
• OpenZeppelin's new EVM template has been fully audited, and now includes 20 byte address conversion, and account abstraction support.
• Turtle is a new cross-chain transfer app supporting Polkadot<>Ethereum bridging, built by Velocity Labs, and powered by Snowbridge.
• Funded by the treasury, Polkadot API 1.0.0 (PAPI), the first stable version, has been released. PAPI offers a suite of modular Typescript libraries to streamline dApp building on Polkadot.
• To celebrate their Tanssi LFD Space, Ava Protocol has launched a Galxe Campaign with a 100 USDC prize pool.
• InvArch’s updated roadmap, with a much stronger emphasis on DAO management, is expected to be completed in the next 3 months.
• Litmus on Kusama is closing. All LIT token balances will be migrated to Litentry on Polkadot.
• The first LAOS referendum on their provisional governance platform Snapshot, proposes to reduce the annual rate of token rewards for collators and their delegators.
• Spazcoin is on a mission to connect the parachains through governance, initiating proposals on Zeitgeist, Astar, and Acala to open 27 XCM channels, and accept 4 incoming XCM requests.
• To improve its decentralized fundraise process, Polimec has proposed to reduce the funding cycle to 21 days, with funding automatically approved, and evaluators rewarded, if a 33% funding target threshold is passed. They have also decided to refund slashed PLMC from the successful ImpactScope and Mandala Chain fundraises.
• Moonbeam Referendum 65 proposes to register the Snowbridge Assets WETH, WBTC, and wstETH.
• OpenGov Referendum 1080 requests 96K DOT to initiate the Open Source Developer Grants Bounty, which aims to fund 15 individual and small-team open source projects with up to USD 30K each.
• The Bifrost Tokenomics 2.0 Proposal aims to use 100% of protocol profits for BNC buybacks by allocating 90% as incentives to holders of the new bbBNC (buy-back BNC) token and burning the remaining 10%.

News from the Finders Program Part 2

Written by Dodow

• You can now view and manage EVM NFTs on many popular chains, including Moonbeam on Talisman.
• Did you take part in Ajuna’s 72 hour BBB competition to craft a Legendary? The prize pool was 10K BAJU, and first prize was a 99,999 SP Bajuberge Egg.
• Moonbeam announces seven winners of The Hug Rarible Illuminate Creativity Open Call, each receiving a $1K grant for their artworks listed on Rariable.
• Participant in Astar dApp staking and earn a 20% bonus by choosing Astar Degens.
• Presumably to celebrate overcoming the issues with the Hydration’sMemepad launch, you can enlist the help of Bastian Köcher using B tokens that were launched on the Memepad.
• Evrloot provides details on its retention rate KPIs following their recent update, showing solid progress.
• There are 12 prizes of $200 USDC in The Moonbeam Lunar Gaming Festival August Adventure. Check out the newly added 2D fighter game, Polybots Rumble.
• Polkadex is advancing to remove its Sudo Keys, with more information to come as they embark on true decentralization of their chain.
• Beefy yields of up to 230% APY, are now available on Stellaswap’s Cowcentrated Liquidity Manager Pools via Beefy Finance.
• Acala announces a collaboration with Kylix Finance, a recipient of a W3F Decentralized Futures Grant. Although full details have yet to be released, they have indicated that LDOT will be utilized in a new innovative lending product.
• Polkadex announces a liquidity mining program will be coming soon.
• Crust Network hosted their monthly community call on August 15th.
• Catch up with Conor Daly as Enrique from Alpha Airdrop hosted an AMA on August 14th.
• NFT artists were in the spotlight in the Moonbeam spaces on August 13th, where winners of The Hug Rarible Illuminate Creativity Open Call were announced.
• On August 14th, Aventus Network hosted Mandala Chain and Unique Network to discuss the benefits of being a parachain on Polkadot.
• Check out The Blockchain Gaming Alliance’s new members presentation on August 14th, featuring Alun Evans of LAOS Network and Nicholas Douzinas of Ajuna Network and Dot Play.
• Aventus hosted a live AMA on August 15th to review its Aventus 2.0 Phase 2 Report.

That is all for this week. If you enjoyed the newsletter, please share it. You can subscribe on Substack to receive an email when next week's edition is ready. And if you're participating in creator staking on Subsocial, you can interact to increase your rewards — perhaps a good two-for-one deal by providing feedback or comments.

Awesome cover art created by Dodow.