Decentralized Finance (DeFi) in Avalanche Ecosystem

Decentralized finance (DeFi) protocols are crucial for user activity on blockchains today. For instance, decentralized exchanges (DEXs) make up a significant percentage of overall crypto trading volume and are typically the primary source of user-generated transaction fees for smart contract platforms and their node operators. In 2024, memecoin trading has emerged as a major driver of user attention and on-chain activity, further emphasizing the utility of DEXs and other DeFi protocols that allow permissionless access to core financial services.

Challenges in User Capital Retention

A key challenge for DeFi protocols is retaining user capital, which is vital for enhancing the product experience for other users. On DEXs, deep liquidity results in tighter price spreads and lower slippage for trades. Similarly, on lending protocols, increased liquidity translates to more attractive rates for borrowers and better capital efficiency for lenders. Liquidity has a self-perpetuating effect; lower fees attract more volume, generating higher yields for liquidity providers (LPs), which in turn attracts further liquidity.
Today, various ecosystems compete for liquidity across protocols and blockchains. This report explores the Avalanche AVAX DeFi ecosystem, currently supported by the Avalanche Foundation’s BOOST campaign, aimed at incentivizing DeFi liquidity.

BOOST Campaign

The BOOST campaign is designed to reward users and LPs within key DeFi protocols in the Avalanche ecosystem, participating protocols include DEXs Trader Joe, GMX, Pharaoh, and WooFi, plus lending protocols Aave, Benqi, and DeltaPrime. The campaign began in July 2024 and will run until October.

The BOOST campaign echoes the Avalanche Rush program, launched in August 2021, which significantly increased the ecosystem’s total value locked (TVL) to an all-time high of approximately $11.4 billion in November 2021. Earlier this year, the Avalanche Foundation initiated the Memecoin Rush, tracking memecoin liquidity, while the BOOST program targets established assets like BTC.b, USDC, and USDT. Currently, Avalanche’s TVL stands around $980 million, a ~$137 million increase since 2024 started but slightly down from its YTD peak of ~$1.27 billion.

Since July, TVL has increased by about $249 million, a 34% rise, indicating that the BOOST campaign positively impacts Avalanche’s liquidity. The increase is driven by incoming capital rather than just the value appreciation of existing liquidity.

Lending & Yield Aggregation

The TVL in Avalanche largely comprises its leading lending protocols, Aave V3 and Benqi, together accounting for around 63% of overall TVL. Aave has distributed BOOST rewards selectively, while Benqi continues to incentivize both lenders and borrowers. Since July, Aave’s TVL rose by about 34%, contrasting with Benqi’s 54% increase, showcasing the effect of incentives on liquidity capture.

Incentivized liquidity in lending markets could create a trickle-down benefit for yield aggregators and leveraged farming protocols, enabling users to enhance their effective yield through borrowing incentivized, yield-bearing assets. For example, Yield Yak leverages Benqi’s BOOST participation to maximize yields from both lending and incentivizing lending. DeltaPrime also maximizes yields further by offering additional AVAX incentives in its leveraged farming strategies.

This incentive structure has significantly benefited DeltaPrime, which has observed a ~179% TVL increase since July. However, while leveraged farming protocols enhance liquidity within DeFi ecosystems, they introduce higher risks to users due to leverage and multi-protocol integration. Recently, an exploit in DeltaPrime’s Arbitrum deployment resulted in a ~$6 million loss due to a private key breach, impacting users otherwise unaffected in the underlying protocols. Despite this, DeltaPrime in Avalanche remains secure with a contract owner time lock for added safety.

DEXs

Besides lending protocols, DEXs are key liquidity sources in the Avalanche ecosystem, facilitating trades on C-Chain and subnets. Trader Joe, being the most influential DEX in terms of liquidity and volume, plays a major role in the BOOST initiative.

On average, Trader Joe has distributed about ~3082 AVAX (approximately $75.4K) weekly in BOOST incentives, totaling around ~33.9K AVAX (about $830K) distributed to LPs since early July. Incentives target 19 pools, including stablecoins and various token pairs, emphasizing tighter price ranges for lower slippage.

The largest AVAX incentive allocation for the week of September 16th was for stablecoin pairs, particularly the USDT-USDC pool. Notably, new stablecoin Agora Dollar (AUSD) has gained traction in the Avalanche ecosystem, reaching a market cap of ~$21 million due to partnerships with Trader Joe and Benqi. Trader Joe has seen a ~38% increase in TVL since July, which amounts to ~$27.3 million.

GMX, another DEX on Avalanche, also gained from BOOST, increasing TVL by ~$16.6 million (32%). Conversely, smaller exchange Pharaoh experienced exceptional benefits from BOOST, growing TVL by ~863% to ~$15.9 million since July.

Monthly DEX volumes across Avalanche remain below March’s peak of ~$9.3 billion, with August reaching ~$2.8 billion – its highest since Q2 2024, likely due to BOOST’s liquidity incentives. Meanwhile, Dexalot experienced declining volumes following the BOOST campaign, signaling a shift in user attention to C-Chain DEXs.

Stablecoins

Avalanche’s stablecoin market cap has increased from ~$1.69 billion to ~$2.14 billion (about 27%) since July, highlighting new capital inflows into the ecosystem. Stablecoins, particularly USD-backed ones, form a critical liquidity component in DeFi, acting as an indicator of ecosystem stability and user interest. Overall, the BOOST program appears to significantly affect liquidity within the Avalanche ecosystem, as evidenced by stablecoin increases.

Looking forward, the challenge remains whether the Avalanche ecosystem can sustain and expand its liquidity, especially as incentives may eventually diminish. Strategic and adaptive management of incentives will be crucial for teams like Trader Joe to continue fostering growth across the ecosystem’s DeFi landscape.