Decentralized Finance (DeFi) and the Avalanche Ecosystem

Decentralized finance (DeFi) protocols play an integral role in user activity on blockchains today. For example, decentralized exchanges (DEXs) now constitute 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 grown into a dominant driver of user attention and onchain activity, further underscoring the utility of DEXs and other DeFi protocols that provide permissionless access to core financial services.

Challenges in Detaining User Capital

A key challenge for DeFi protocols is the retention of user capital, which serves a vital role in enhancing the product experience for other users. On DEXs, deep liquidity enables tighter price spreads and lower slippage for trades. On lending protocols, more liquidity means more attractive rates for borrowers and better capital efficiency for lenders. Liquidity also creates a self-perpetuating effect; lower trading fees and borrowing costs attract more volume, generating higher yields for liquidity providers (LPs), which in turn attracts more liquidity, further reducing user costs, and so on. The current DeFi landscape is more competitive than ever, with different ecosystems constantly vying for liquidity fractured across protocols and blockchains.

BOOST Campaign

The BOOST campaign is an incentive program designed to reward users and LPs across key DeFi protocols in the Avalanche ecosystem. Protocols participating include DEXs Trader Joe, GMX, and Pharaoh, as well as lending protocols Aave and Benqi. The BOOST campaign began in July 2024 and will last through October.

This campaign is reminiscent of the Avalanche Rush incentive program launched in August 2021, which helped push the Avalanche ecosystem’s TVL to an all-time high of ~$11.4 billion in November 2021. In early 2024, the Avalanche Foundation launched the Memecoin Rush incentive program targeting memecoin liquidity, while the BOOST program focuses on well-established assets like BTC.b, USDC, and USDT. Currently, the TVL on Avalanche is ~$980 million, indicating a gain of ~$137 million since the beginning of 2024.

Lending & Yield Aggregation

The two largest lending protocols in the Avalanche ecosystem, Aave V3 and Benqi, dominate the TVL, making up ~63% of it. Aave initially provided BOOST rewards in selected lend/borrow markets for a limited period, while Benqi continues to incentivize both lenders and borrowers. Incentivized liquidity in lending markets creates a trickle-down effect for yield aggregators and leveraged farming protocols. DeltaPrime has benefited significantly from these strategies, seeing its TVL grow by ~179% since July.

DEXs

Trader Joe remains the most dominant DEX in the Avalanche ecosystem, distributing significant AVAX rewards. Since the program's start in July, it has allocated ~$830K in incentives, contributing to a ~38% increase in TVL. GMX and Pharaoh have similarly benefited, with Pharaoh managing an impressive ~863% TVL growth since July.

Stablecoins

The stablecoin market cap in Avalanche has increased from ~$1.69 billion to ~$2.14 billion since July, indicating a notable sign of new capital inflows, particularly with USD-backed stablecoins being key components of liquidity in DeFi.

The Avalanche Foundation’s BOOST program has been pivotal in enhancing liquidity metrics and further confirmations of its impact are seen through the continued influx of stablecoins. However, sustaining and growing liquidity remains a crucial objective for Avalanche, especially if incentives begin to decrease over time.

Conclusion

Incentives are effective in attracting user interest and capital, but the real test for the Avalanche ecosystem is whether it can maintain growth in liquidity sustainably in the long term, especially through strategic allocation of resources and incentives across its many DeFi protocols.