DeFi projects look to replenish treasuries after crypto collapse

The treasuries of DeFi projects usually comprise their native tokens as well as other cryptocurrencies. PHOTO: REUTERS

NEW YORK - Some of the largest projects left standing in decentralised finance (DeFi), created as a parallel universe to traditional lending but minus intermediaries such as brokerages and banks, appear to be still feeling the pinch of the springtime collapse of the sector.

Aave Companies, the main developer behind the biggest DeFi lending project, is seeking US$16.28 million (S$22.9 million) from the so-called decentralised autonomous organisation (DAO) that governs the protocol. It is the first time the development team has asked for money from the Aave DAO, according to a proposal. A vote on the plan, which will close on Sept 8, has already has received the quorum needed for approval.

"As the Aave protocol has grown into what it is today, costs associated with development have risen substantially," the proposal said. "Building an innovative, secure and battle-tested version of a protocol such as Aave V3 requires experienced builders across a variety of skill sets that are fairly compensated for their work."

Aave's developers are not alone in seeking to weather DeFi's ongoing liquidity crunch. Lido DAO, which manages Lido Finance, one of the biggest projects as measured by the total value of crypto locked on the platform, recently approved a proposal to sell 10 million of Lido's native token to venture capital firm Dragonfly Capital. The sale followed the rejection of several proposals put before its community on how to manage its assets in order to cover two years' worth of expenses.

"Candidly, we moved too slowly," said Mr Jacob Blish, head of business development at Lido Finance, acknowledging the project's failure to anticipate the consequences of the crisis earlier. He added that Lido had focused on everything else but managing its money in the middle of the bull market.

At its height earlier this year, money woes seemed like the last problem DeFi would have. The sector attracted billions of dollars in investment and saw activity surge, generating million of dollars in revenue. The value of the treasuries of top DeFi projects have come down significantly in tandem with token prices during the current bear market, according to blockchain data provider Nansen.

Aave DAO's liquid assets stand at US$378 million, compared with over US$800 million in April. Lido DAO saw its liquid assets' value drop to around US$344 million from about US$800 million. Uniswap, one of the most popular decentralised exchanges, also saw the value of its DAO treasury drop to about US$1.7 billion, from US$2.5 billion five months ago. The three are among the wealthiest DeFi projects based on the value of their treasuries.

"We really started understanding how serious this was going to get once we entered into mid-, late May, as Terra and the CeFi (centralised finance) protocols started getting worse with inflation running away, the war overseas, whatever else is going on," Mr Blish said.

Unlike the typical tech start-up, the treasuries of DeFi projects usually comprise their native tokens as well as other cryptocurrencies. Aave's proposal is mostly for stablecoins.

"We've seen protocols being just too bullish on crypto and having all their treasury in Ethereum" or Bitcoin, said Mr Diogo Monica, co-founder and president of crypto platform Anchorage Digital. "Whenever crypto goes down, their treasuries also go down, which materially changes their ability to run their protocols, businesses, treasuries and foundations."

In hindsight, some industry observers said it is not surprising that some of the biggest DeFi projects are struggling with money. Then there is the example of the likes of Kyber Network, a decentralised trading platform that disclosed previously that it had "a small portion" of treasury exposed to failed hedge fund Three Arrows Capital.

"A lot of them are more technical founders who are extremely book-smart," said Mr Jake Dwyer, managing director at crypto financial services firm GSR. "When it comes to finance, they are not experienced asset managers." BLOOMBERG

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