What Determines a DeFi Blue Chip?
DeFi blue chips are established dApps that have stood the test of time, demonstrated a relative degree of defensibility, and proven their product market fit.
The term blue chip comes from TradFi, originating on the social layer. Investors collectively use the term to describe recognizable, well-established companies. These blue chips boast large market caps and financially sound business models with impressive track records of returns for investors.
DeFi has matured rapidly and boasts its own cohort of established entities that are similarly perceived and generally recognized as a safe bet for investors looking to gain exposure to the rapidly evolving world of decentralized finance. Welcome to DeFi’s blue chips.
Key Takeaways
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DeFi has matured to the point where a cluster of established protocols has emerged, with the group earning the TradFi moniker of blue chip.
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Blue chip DeFi protocols must find product market fit, create value, and capture value.
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Most blue chips operate in an existing financial vertical with an already constructed business model but are deployed fully on-chain.
Smart Contracts, Protocols, and the DeFi Philosophy
Smart contracts are pieces of code that execute deterministically. Stored and executed on-chain these code blocks remove human error and always produce the same output from a given starting condition. Stored on the blockchain, users interact with smart contracts to perform actions in a trustless and permissionless manner.
A DeFi application consists of two major components: the smart contracts on the protocol layer and the front-end service on the application layer. All the functionality exists on the protocol layer, and the front end or interface is the access point for ordinary users.
The absence of intermediaries and a sovereign attitude constitute the central drivers of DeFi. It removes unnecessary entities from the operational chain, ensuring a more direct value transfer between economic participants. And this is DeFi’s greatest strength.
DeFi is a frictionless marketplace devoid of middlemen, making it an entirely skill-based arena.
Whistlestop Tour of DeFi’s History
A number of protocols were launched in 2017 that have since become integral parts of the ecosystem, but the prevalent use case throughout this era was the ICO boom. Individuals could participate in the earliest funding rounds during raises for new projects, and a speculative frenzy descended.
Development continued, and the next breakthrough phase was in 2020, now dubbed DeFi Summer. Compound launched the COMP token, firing the starting pistol on the yield farming mania, and Andre Cronje launched Yearn, providing the blueprints for DeFi’s yield aggregation branch. It was the era of imaginary money fueled by speculative greed.
Source: https://defillama.com/
DeFi experienced a stress test in 2020 during the Covid-19 market dump, and a decline one year later in May 2021 when China banned crypto and ripples of fear shuddered through the markets, causing a steep decline in Ethereum’s value and, therefore, the TVL of DeFi.
It was then up only until late 2021 when DeFi’s TVL topped out at over $325 billion. Then came the destruction of 2022, where DeFi TVL shrank rapidly, losing 60% between May and June. This was driven by the Terra-Luna crash that caused the crypto market to implode and all the resulting contagion, which marked the start of crypto winter.
The bear market cleansed a highly frothy market, and the DeFi protocols labeled as blue chips in this article have been selected based on several parameters; primarily the ability to generate fees and drive organic activity.
More broadly speaking, the shift from centralized to decentralized is occurring at almost every level in crypto, from team operations to end-user interaction, and the DeFi story is crypto’s most profound narrative.
The selection process adopts a fundamentals approach and speaks directly to the protocol and its services as opposed to the tokens attached to these protocols. A successful DeFi protocol must do three things: find product market fit, create value, and capture value. One notable theme when looking at DeFi blue chips is that many exist in valuable financial verticals where the business model already exists.
Protocols featured in this article have been ordered via fee generation over the last thirty days and is accurate at the time of writing. Now, without further ado, let’s take a look at the giants that survived the winter and are planting the spring seedlings for the next DeFi boom.
Do note that this article is for education purposes and is not meant to serve as financial advice, and neither is this list meant to be exhaustive. Always do your own research before investing in any protocols.
Lido: Liquid Staking Service Provider
Source: https://lido.fi/#networks
Lido is the newest protocol on this list, but the product market fit of liquid staking speaks for itself. Rapidly becoming the most prominent DeFi protocol ranked by TVL ($14.1 billion), it has become the newest and most widely utilized financial primitive in the space. The core product offerings include stETH, a rebasing token that accrues daily staking rewards, and the increasingly popular wstETH token, which retains a constant balance – which makes it more composable leading it to become a base collateral on Layer 2s.
The enormous success of Lido has even led to self-limiting debates, which, at their core, misunderstand the makeup of Lido. Lido may be the governing entity, but thirty unique validators comprise Lido. The revenue split is 90/5/5, with the lion’s share going to stakers, 5% to the Lido DAO, and 5% to node operators.
Source: https://tokenterminal.com/terminal/projects/lido-finance
Lido is an absolute fee-printing monster, and the management of this fund has driven significant interest and attention toward LDO ownership. The governance token enables holders to vote on protocol parameters, such as approving new validators, and allows them to direct treasury spending.
Source: https://debank.com/profile/0x3e40d73eb977dc6a537af587d48316fee66e9c8c
Perfectly capturing the Ethereum wave, Lido has secured its position as a blue chip. It has to be one of the most effective protocols judged by the criteria of achieving product market fit, creating value, and capturing value. Most notably, Lido’s first-mover advantage and the deep integration of stETH and wstETH in DeFi give the protocol excellent defensibility, and it would take an incredible service provider to displace this market leader.
Uniswap: DeFi’s Largest Trading House
Source: https://uniswap.org/whitepaper-v3.pdf
Uniswap was launched in 2018 and is DeFi’s largest DEX, with over $3.2 billion in TVL. Nearly every DeFi user has made a swap using this DEX, and the team behind Uniswap has not stopped shipping. Uniswap has pioneered introducing the basic AMM model – the mainstay for DEXs – launching V3 and concentrated liquidity pools and is now working on developing V4 and Hooks. Hooks will integrate new functionality into existing liquidity pools, and opening the arena to more human capital (V4 is open-source, and all developers can code Hooks) will allow for more varied functionality, for example, introducing on-chain limit orders.
But beyond the scaling of its core business, Uniswap has also adopted a horizontal growth approach, launching a wallet and wading into the aggregation market with UniswapX, which leverages off-chain orders, allowing the free market to compete to fill bids.
Uniswap’s early mover advantage perfectly showcases the ability of the market incumbent to compound its gains. And in the bear market, as forks and clones die off, the advantages of being a market leader have magnified in intensity.
Source: https://tokenterminal.com/terminal/projects/uniswap
Despite possessing no unique defensibility, Uniswap reigns supreme in the DEX landscape. Trading volumes trended upwards for the first half of 2023 and have remained steady since June. This year, Uniswap’s Spot Trading Volume has exceeded Coinbase’s. A perfect microcosm of the trend toward decentralized service providers – easily observable when comparing DEX to CEX spot trading volume.
Source: https://www.theblock.co/data/decentralized-finance/dex-non-custodial/dex-to-cex-spot-trade-volume
MakerDAO: DeFi’s Central Bank
Source: https://makergrowth.notion.site/makergrowth/Maker-Brand-f53780f0ba2f4a0e90e3c330fd67d30f
MakerDAO is the issuer of DAI and the closest thing that DeFi has to a central bank. The principal product is DAI, a decentralized stablecoin that users mint via opening a collateralized debt position (CDP), locking collateral in MakerDAO, and receiving DAI in return.
DAI remains DeFi’s largest decentralized stablecoin, depending on the definition of decentralized given that now DAI is primarily collateralized by centralized stablecoins such as USDC and real world assets (RWAs).
Source: https://dune.com/queries/58495/116324
MakerDAO has an impressive TVL of nearly $5 billion and has aggressively upped its exposure to RWAs. The resulting yield from all these T-Bills has allowed it to reignite its buyback and burn program, much to the benefit of MKR holders. MakerDAO has also expanded more broadly into the lending market, and users can now borrow, lend, and gain leveraged exposure.
The boost to the Enhanced DAI Savings Rate (EDSR), similarly powered by the RWA approach adopted by MakerDAO, has increased demand for DAI ownership. Fees for MKR holders have been posting positive growth through 2023, the outstanding supply of DAI has risen, and the native token MKR has displayed some of the strongest price growth this year to date amongst DeFi blue chips. All solid metrics indicating the fundamental strength of MakerDAO.
Source: https://tokenterminal.com/terminal/projects/makerdao
MakerDAO has adapted better than most to the current environment and has certainly changed over the years from the days when DAI was primarily collateralized by Ether. Rune Christensen, CEO and co-founder of MakerDAO, has grand plans known as MakerDAO’s Endgame, which will see a branding revamp, the creation of a governance-specific chain, and the introduction of sub-DAOs. MakerDAO has perfectly surfed the RWA wave, and its adaptive approach has allowed it to not only maintain its dominance but multiply its advantages.
Aave: DeFi’s Borrowing House
Source: https://aave.com/
Aave is DeFi’s dominant lending market and a prime example of how protocols serving an existing market demand have thrived. It has a TVL of over $7.4 billion and was originally launched in 2017 as ETHLend, subsequently rebranded to Aave. This protocol has become a staple and a protocol almost every DeFi enthusiast has used at some point.
The business model is straightforward. Users who want to earn yield on idle assets supply them, the demand side, which borrows, pays a fee for utilizing the service, and Aave takes a percentage of this fee, with the bulk of it going to the supply side. Aave leverages supply-driven interest rates, and the model excels in its simplicity: the supply side wants yield, and the demand side wants increased market exposure.
Aave has undergone numerous iterations, and V3 features the greatest capital efficiency to date, cross-chain functionality, and, most notably, improved risk management thanks to its isolated markets. Token holders can stake their AAVE in the Safety Module and earn payment for protecting the protocol against shortfalls. In the event of bad debt, AAVE will be liquidated from the Safety Module to cover the position.
The launch of GHO saw Aave wade into the decentralized stablecoin race, and users can leverage assets earning interest to mint GHO. It has a modest borrow rate of 1.51% and users staking AAVE in the Safety Module receive a further borrow rate reduction.
Active loans and fee generation have both observed a consistent uptick throughout 2023, and these vital signs of health provide evidence that the market appetite for risk-taking has increased.
Source: https://tokenterminal.com/terminal/projects/aave
Aave benefits from the larger macro trend of investors preferring lending protocols over yield farming due to the ability to provide single-asset liquidity and enjoy all the upside, sidestepping the perils of impermanent loss.
Compound: DeFi Lender
Source: https://compound.finance/
Compound is another lending protocol that has been central to DeFi since the outset, originally launching in 2018. Even before starting the yield farming craze, Compound was a popular protocol. It allows users to earn dependable yields on their assets and take out collateralized loans if desired.
Compound III allows users to borrow the base asset (ETH or USDC) and is currently deployed on Ethereum, Arbitrum, Base, and Polygon. Boasting an impressive TVL of $2.8 billion and still distributing COMP tokens to this day. Compound has become a mainstay for investors looking to earn yield on their idle assets.
Compound similarly displays solid metrics throughout 2023 with an increased volume of active loans. Which naturally means the protocol generates more fees. This steady uptick in activity lends strength to two theses. First, risk-taking behavior has increased throughout 2023, with market participants feeling more confident. Two, blue chips with solid market fit and an ability to create as well as capture revenue will lead crypto into the next bull market.
Source: https://tokenterminal.com/terminal/projects/compound
Synthetix: A Backend Liquidity Engine
Source: https://synthetix.io/
Synthetix is a DeFi-native liquidity layer providing services to on-chain trading products. Housed on Ethereum and Optimism, Synthetix is the liquidity backend for protocols such as Kwenta – a perpetual market where traders can speculate on assets with up to 50X leverage. Users stake the native token SNX, which collateralizes the synths (synthetic assets tracking the price of assets) and earn trading fees in return.
Synthetix stakers underwrite synthetic asset market activity and act as the trading counterparty. Currently, in the process of shipping V3, the Synthetix team has overhauled the protocol, allowing it to become a permissionless liquidity block for constructing financial services. V3 will introduce better risk management for SNX stakers, allowing them to choose which markets they want to collateralize.
Alongside better risk management for stakers, V3 aims at greater generalization and modularity. This will make Synthetix’s liquidity more composable, allowing anybody to spin up a derivatives market using this capital primitive.
Fee generation and trading volume have been in a steady uptrend throughout 2023 – the central hallmarks of a blue chip protocol. Operating in the perps space means Synthetix has an obvious fee generation model, and trading activity remains one of the core profit centers within the crypto landscape. More volume happening on-chain instead of off-chain via centralized order book models bodes well for Synthetix and SNX stakers.
Source: https://tokenterminal.com/terminal/projects/synthetix
Source: https://tokenterminal.com/terminal/projects/synthetix
Curve Finance: DeFi’s Stablecoin Swapping Engine
Source: https://curve.fi/#/ethereum/swap
Curve Finance is the stablecoin engine of DeFi and allows users to earn yield by pairing assets that behave similarly, thereby avoiding impermanent loss. Founded in 2020, Curve rapidly absorbed TVL and cornered the stablecoin swapping market with a current TVL close to $2.5 billion.
Famous for its vote escrow model and all the applications built on top of the protocol, it has become a keystone composability brick in DeFi. Curve has been more successful than most at attracting sticky liquidity due to its veTokenomics creating game-theorized alignment between holders and the protocol’s success.
Curve survived the recent reentrancy exploit, amplified in intensity due to overextended leverage across lending protocols. Large OTC buyers stepped in, and these large buy orders speak volumes about the faith that crypto’s most prominent operatives have in Curve’s staying power.
Yearn: Automated Yield Aggregator
Source: https://yearn.fi/
The brainchild of Andre Cronje, what began as a simple protocol automatically moving stablecoins to the highest yield opportunities exploded into a DeFi powerhouse. Yearn’s native token YFI made an outrageous rally throughout 2020 and 2021, cementing Yearn into the crypto consciousness.
Of all the sectors in crypto, yield aggregators have suffered the largest drawdown in TVL throughout the bear market, and that is by nature of their design – they only aggregate. When yield sources dry up, naturally, interest declines, and investors pull liquidity.
Yearn’s TVL has dropped throughout 2023, but innovation has not stopped, and the most recent offering is a liquid staking product known as yETH. yETH consists of a basket of liquid staking derivatives (LSDs) and can be staked to mint st-yETH, and holders accrue yield. This bundle of LSDs means holders earn risk-adjusted yields from Ethereum staking, and pool weights can be rebalanced based on performance.
Source: https://tokenterminal.com/terminal/projects/yearn-finance
Token Versus Protocols
The two are distinct. All of the blue chips listed in this article feature due to the value proposition of the protocol itself, not the underlying token. And even amongst these market leaders, a sizable disparity exists in token functionality. Take YFI, a governance token, versus SNX, the liquidity token of Synthetix. YFI holders rubber stamp governance proposals, but developers building vaults create all the value, whereas SNX stakers actively underwrite trading activity.
An excellent protocol does not necessarily mean a terrific token.
The Old Generation & Horizontal Scaling
It is far easier to judge the older cohort of dApps as blue chips or not, given that the majority of token incentives for these protocols have ended or been substantially reduced in scope. That means fee generation and user activity are organic as opposed to incentivized.
One emergent trend has been diversification in offerings, with almost all of these blue chips expanding into a new or adjacent market sector. And this is another symptom of being a market leader. These entities have the capital and talent to diversify and increase their offerings, targeting a broader market share of the crypto industry. This confluence can also be observed in the central Layer 1s. Previously thought to have to pick two of the three traits from the blockchain trilemma (decentralization, scalability, and security), now these actors are widening their developmental focus. This points to a maturing market with entrenched actors controlling a larger market share.
The bear market has been an excellent period of consolidation for these protocols, and capital movement mirrors a flight from risk. Investors dump their more speculative altcoins and hold larger caps during the bear market. The same thing happens in DeFi. Users naturally gravitate towards protocols with greater TVL due to their higher perceived security.
A New Generation of Blue Chips on the Horizon?
Each cycle brings a new progressive cohort of protocols; the coming cycle will be no exception. Areas of interest include the fixed yield space, RWAs, and perps. All of these verticals will undoubtedly present a blue chip protocol and perhaps already have.
From a more macro perspective, DeFi’s value proposition continues to increase, and as blockspace gets cheaper, it opens the path for new on-chain business models. And more and more applications will go on-chain. The impressive fee metrics posted by the current blue chips herald the next expansionary phase for DeFi, and the seeds for DeFi Summer 2.0 have already been planted. All that remains to be seen is who will be at the head of the next generation of DeFi blue chips.
Kofi J has been active in DeFi since the 2020 summer explosion and has been rugged more times than he can remember. He hopes to make the decentralized economy a little bit more accessible through his prose. Follow the author on Twitter @k_pangolin
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