From messari by John_TotalValue_Locke
Key Insights
- Despite facing setbacks from the Fantom bridge hack in mid-2023, QiDao's total value locked (TVL) grew 11% in Q1, rising over $3 million throughout the quarter. This growth was led by Polygon, where QiDao cleared all bad debt.
- To restore the MAI peg, QiDao removed bad debt and reduced the MAI circulation through a buyback and burn program concentrated on Polygon. These efforts stabilized the ecosystem and mitigated further risks associated with the depeg events.
- Despite the TVL growth, demand-side revenue significantly dropped. The reduction in fees, especially the 28% QoQ drop on Polygon, signals a need for recalibrating the fee structure or enhancing user engagement strategies to boost protocol earnings.
Primer
QiDao (QI) is a decentralized finance (DeFi) protocol that was originally launched on Polygon. It enables users to borrow stablecoins against their cryptocurrency holdings without selling them. The protocol's native stablecoin, MAI, is pegged to the value of the U.S. dollar (USD) and is minted by depositing supported collateral in smart contracts. QiDao operates on a multichain framework, supporting various networks to broaden its accessibility and utility.
The protocol employs a collateralized debt position (CDP) mechanism, where users can mint MAI by depositing collateral through cryptocurrencies, such as Ethereum, wrapped Bitcoin, or other supported assets. The system is designed to ensure overcollateralization, minimizing liquidation risk from volatile market conditions. Users are incentivized to maintain a healthy collateral ratio to avoid liquidation penalties.
QiDao's governance is driven by tokenholders that use QI, its governance token, to vote on key protocol decisions, including collateral types, risk parameters, and improvement proposals. This decentralized governance model aims to align the protocol’s interests with those of its users.
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Performance Analysis
In July 2023, the Fantom bridge, Multichain was hacked, affecting QiDao operations. Though QiDao’s contracts were not hacked, the Multichain exploit led to the withdrawal of MAI minted on Fantom. Given that there was more MAI than collateral, other chains were left with bad debt. QiDao has worked to remove the excess MAI from the affected networks and to help return MAI to peg, enabling the protocol to return to its normal operations.
Throughout the quarter, QiDao's total value locked (TVL) increased by over $3 million or nearly 11%. This change reflects varied performance across different networks within its ecosystem. MAI depegged due to the bad debt that resulted from last year’s bridge hack on Fantom; meanwhile, the average trade price for Q1 was $0.53.
Polygon, where outstanding MAI is overcollateralized, led to TVL growth in absolute terms, with TVL rising by ~$3.54 million. The growth indicates robust activity and increased adoption of QiDao protocols on the chain. The 19.4% increase was also the largest percentage increase among other networks.
Conversely, Optimism faced the most significant challenges, with its TVL reducing by approximately $1.03 million (a 54.9% decline). This decline is the largest in both absolute and percentage terms. Optimism was the most exposed to the bad debt, with nearly $5 million in bad debt at the start of the quarter. There was not much change on QiDao’s newest deployment on Base, but a recent vote to enable AERO as collateral could help.
Polygon had the largest decrease in MAI circulating supply, both in absolute and percentage terms. The supply shrunk by approximately 1.65 million MAI, a 26.9% decrease. Part of this drop came from the nearly 669,000 MAI that was bought and burned by the DAO to remove all bad debt on Polygon. Base was the only deployment measured where MAI supply rose, climbing 8% to 2.4 million MAI. QiDao launched on Base on August 31, 2023. Other QiDao instances such as Ethereum, Optimism, and Arbitrum also saw reductions in their MAI circulation, with declines of 5.8%, 8.7%, and 7.7%, respectively. These changes indicate a broader trend of decreasing MAI circulation across most supported networks.
Despite the rise in TVL, fees paid by users continued to fall on the five chains measured. Protocol revenue is calculated by aggregating the deposit volume multiplied by the deposit rate, total repayment volume multiplied by the redemption fee rate, and swap volume multiplied by the MAI swap rate. After paying just under $300,000 last year for loans on QiDao, users only paid $16,200 in Q1’24. The fees are almost entirely from Polygon and Optimism, which generated $11,500 and $4,600 in the quarter, respectively. For Polygon, QiDao’s largest and most active network, this represented a 28% drop in fees QoQ.
Fees are split 50/50 between the DAO and QI token lockers. At the moment, it is likely more important for the DAO to earn revenue as it balances buying back excess MAI to repeg the asset without running down reserves. MAI was designed to be cross-chain compatible, but since the depeg, QiDao has disabled native MAI bridging to reduce contagion. This action could be hurting usage. Furthermore, the DAO is still working to repeg MAI and regain borrowers’ trust.
Key Developments
- January 4, 2024: QiDao added a PSM (Peg Stability Module) vault to enhance the stability of the MAI stablecoin. This strategic move aims to improve MAI's robustness against market volatility and ensure its peg to the USD.
- January 12, 2024: The protocol deprecated dQUICK as collateral. This decision was made to streamline the assets and improve the security and efficiency of collateral management.
- January 19, 2024: QiDao halted all existing MAI liquidity mining incentives and redirected all protocol revenues to further incentivize MAI, aiming to boost its utility and adoption.
- January 19, 2024: USDM was onboarded to the PSM, expanding the ecosystem and enhancing the stability mechanisms for another major stablecoin within the QiDao environment.
- January 23, 2024: QiDao was deployed on zkEVM, marking a significant technological advancement. This deployment on a zero-knowledge (ZK) Ethereum Virtual Machine (EVM) network underscores QiDao's commitment to privacy and scalability.
- January 26, 2024: Borrowing costs were aligned to the Federal Funds rate. The move was made to synchronize with traditional financial benchmarks, enhancing the economic realism and appeal of borrowing.
- January 26, 2024: vGHST was deprecated as collateral, continuing the protocol's efforts to refine and optimize the collateral types used within its systems.
- January 29, 2024: All bad debt was removed from the Polygon platform, significantly cleansing the balance sheets and restoring confidence in the protocol's financial health.
- February 6, 2024: Deployment on Fraxtal (Frax Finance L2) was initiated, which is expected to enhance liquidity and user interaction through increased accessibility and reduced transaction costs.
- February 8, 2024: The protocol began driving financial insights via Den, leveraging advanced data analytics to provide users and stakeholders with deeper financial intelligence and forecasting abilities.
- February 22, 2024: xBOO was deprecated as collateral as part of an ongoing review and refinement of the assets accepted by the protocol to ensure stability and reliability.
- February 24, 2024: The Band protocol was integrated for oracle services, enhancing the protocol’s data accuracy and security for asset pricing, crucial for collateral management.
- February 28, 2024: QiDao removed fees on vaults on Base for cbETH and wstETH, reducing the cost burden on users and encouraging greater participation and investment within these assets.
- March 15, 2024: sDAI was onboarded to the PSM, aligning with QiDao’s strategy to expand its stablecoin support and enhance ecosystem synergies.
- March 19, 2024: The UMA token was used in a test run for the Oval OEV, experimenting with new token functionalities and broadening the protocol’s asset base and utility.
Closing Summary
The first quarter of 2024 was a period of recovery and strategic realignment for QiDao. Following the setbacks from the previous year's security incidents, the protocol successfully implemented measures to secure and stabilize its operations across multiple chains. QiDao introduced new collateral types and started burning MAI to address bad debt. Its TVL also grew by 11% QoQ.
Moreover, the protocol brought on technological upgrades such as deployments on zkEVM and integrations with new oracle services, demonstrating its commitment to maintaining a competitive edge in the DeFi space. The substantial decrease in revenue highlights the ongoing challenges in balancing fee generation with user growth and retention.
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