TON: DeFi Landscape

Note from First Stage Labs: This public article is the result of an internal report conducted in December 2022. We have decided to disclose the report as part of our continuous effort to improve TON Ecosystem.

Where are we now and where we are heading

This report presents an overview of the current state of DeFi in The Open Network (TON), analyzes the timelines of DeFi ecosystems in other blockchains, and outlines the priorities and potential next steps for building DeFi on TON. To ensure impartiality, we asked for a second opinion from various external parties which had an impact on the final list of suggestions.

We worked closely with the Whiterabbit research team to create this report and ensure that it presents an unbiased view from capable analysts external to the ecosystem. The report you are reading is the result this combined effort and collaboration.

Before we begin, it is important to note that the applicability of other DeFi ecosystem histories to TON may be limited. Most of the protocols mentioned in this report were developed during a bull market, and the complexity of the macroeconomic context means it is unlikely that the same set of circumstances will align in exactly the same way, leading to an identical outcome. Nevertheless, we believe that looking at the timelines of DeFi ecosystems in other blockchains can give us valuable insight into TON’s current position and where it may be heading.

The current state of DeFi in TON

The Open Network (TON) is a PoS blockchain with high native token capitalization and a base infrastructure but also centralized token holding, low TVL and low on-chain activity numbers.

The Open Network has a base infrastructure that allows developers to deep dive into the blockchain:

• Dev tools (TON API, TON Minter, IDE plugins);
• Smart contracts auditors (Certik, 0xGuard, HashEx);
• Cross-chain bridges (TON and Orbit bridges).

Strong teams (in terms of product and traction) have appeared on TON that will be able to cover several key ecosystem areas in the long term:

• Wallets (Tonkeeper, Tonhub, Telegram-native custodial @wallet);
• NFT marketplaces and username sale marketplaces (GetGems, Fragment);
• Launchpads (Tonstarter, TON Play, Gagarin);
• DEXs (STON.fi, DeDust.io);
• Staking pools (TON Whales).

At the same time, a few other areas are yet to be filled:

• Infrastructure (oracles, bridges);
• DeFi (lending, stablecoins, yield aggregators, etc.);
• Mass adoption educational programs and courses.

Based on DefiLlama data, the Total Value Locked in TON is currently at $500K with STON.fi dominating 100% of the market. This places TON’s TVL on par with that of Solana, Polygon, and NEAR during their first few weeks of being listed on DefiLlama in the bullish late-2020 to 2021 markets.

• Solana’s TVL was made up of 2 DEXs (Raydium and Orca) and a stable swap tool called Mercurial Finance;
• Polygon had 2 DEXs (Quickswap and Dfyn Network) and the Polygon-native prediction platform, Polymarket;
• NEAR’s was comprised of Ref Finance (DEX) and Meta Pool (liquid staking);

During its initial launch, Aptos deployed +10 projects which caused an immediate spike in TVL to around $3M. These first projects included 6 DEXs, 2 liquid staking tools, 2 lending tools, a market prediction platform, and a CDP tool.

Timelines of DeFi ecosystems in other blockchains

In this segment, we will examine the order in which notable DeFi projects were launched and their contribution to the TVL of the networks. We will primarily focus on the top 25 DeFi projects on Polygon, Aurora, and Solana, as well as the DeFi projects on NEAR and Aptos listed on DefiLlama.

Polygon

Polygon is a Layer-2 blockchain that was built with a view to solving Ethereum’s scalability issues. Consequently, its DeFi ecosystem is heavily influenced by Ethereum. Polygon has the largest number of DeFi projects across all chains that were considered in this research. However, most of these DeFi projects operate across multiple chains and Polygon does not make up their largest TVL. There are very few Polygon-exclusive DeFi solutions.

Stage 1 — Q4 2020-Q2 2021 — DEXs, lend/yield, 1inch, and Polygon-native prediction platform Polymarket:

• Quickswap, Curve, Sushi. Quickswap, Curve and Sushi were among the first DEXs to be launched on Polygon and are currently in the top 10 according to TVL. Whilst Quickswap is Polygon-native, Curve and Sushi are built on Ethereum.
• Polymarket. Polymarket is a decentralized gambling platform built on Polygon. Polymarket allows users to bet on the outcomes of highly-debated topics and earn rewards if their predictions are correct. Although Polymarket was fined $1.4 million by the Commodity Futures Trading Commission and ordered to cease non-compliant trading in the US, it still maintains its pre-shutdown TVL.
• 1inch. 1inch launched on Polygon in May 2021. At first, only the aggregation protocol was available, whilst liquidity and governance protocols were added later. At the initial stages, aggregation was available for Curve, SushiSwap, QuickSwap, Aave V2, and Cometh.

Stage 2 — late 2021 — more yield tools, bridges, Uniswap, reserve currency:

• Beefy. Beefy Finance is a Multi-Chain Yield Optimizer that enables users to yield farm, provide liquidity, and trade assets.
• Uniswap V3. Uniswap expanded to Polygon in November 2021.
• Stargate. Stargate is a DeFi-focused liquidity bridge. Other chains include Ethereum, Avalanche, BSC, Arbitrum, Optimism, and Fantom.
• Klima DAO. The KLIMA token is a reserve currency aimed to solve critical problems for carbon markets: illiquidity, opacity, and inefficiency.

Stage 3–2022 — derivatives:

• Gains Network and SynFutures. Gains Network and SynFutures are decentralized derivatives trading platforms built on Polygon.

NEAR

With the launch of the Rainbow Bridge, DeFi officially became live on NEAR as it unlocked the use of all assets originating in Ethereum. Within just five months, NEAR saw the launch of several core DeFi projects, including Ref Finance, (a DEX and core NEAR project), Meta Pool (a liquid staking solution), and Oin Finance (a stablecoin issuance platform). In May 2021, Aurora was also launched on top of the NEAR network as an Ethereum Virtual Machine built to function as an Ethereum-compatible scaling solution. The projects on Aurora now contribute to the largest share of DeFi TVL on NEAR.

Stage 1 — late 2021 — DEX, liquid staking, bridges:

• Rainbow Bridge. This marked the start of DeFi on NEAR and facilitated interoperability between layer-one blockchains. It connects Ethereum and NEAR, allowing anyone to transfer ERC-20 tokens between the two platforms.
• Ref Finance. This is a core project in the DeFi ecosystem on NEAR Protocol, which combines the core components of DeFi including; a decentralized exchange (DEX), lending protocol, synthetic asset issuer, and more.
• Meta Pool. The main liquid staking protocol on NEAR.
• Flux Protocol. A cross-chain oracle that provides smart contracts with access to economically secure data feeds.

Stage 2–2022 — more lending and staking tools:

• Burrow. Burrow is an interest rate market protocol built on NEAR that allows users to supply and borrow interest-bearing assets.
• LiNEAR Protocol. LiNEAR Protocol is another liquid staking solution on NEAR. It unlocks the liquidity of staked NEAR by creating a staking derivative to be engaged with various DeFi protocols on NEAR and Aurora.

Aurora

• Trisolaris. Trisolaris is a community-owned DEX on the NEAR Aurora EVM. Trisolaris markets itself as the best alternative for those that want an Ethereum-like experience without the high gas fees and long transaction times. On Trisolaris, users are able to provide liquidity for any ERC20 tokens on Aurora, swap between ERC20 tokens, and earn fees for providing liquidity.
• NearPad. NearPad is a launchpad, DEX aggregator, and yield aggregator all in one and is changing the way communities and developers access open finance tools for crowdfunding, asset management and yield optimization. It is giving its community complete control over how treasury and public funds are utilized for the ecosystem.
• Bastion. Bastion protocol is an algorithmic, decentralized lending and borrowing protocol. The project is built on Aurora, NEAR’s EVM-compatible and gas-less layer. Bastion focuses on tokenomics, composability, UX, and algorithmic risk optimization. Bastion gives users the ability to put assets up as collateral, supply assets and earn interest, leverage long, short or borrow assets.
• Empyrean DAO. Empyrean DAO is the first project to bring a decentralized reserve currency called EMPYR to the Aurora ecosystem.
• Aurora+. Aurora+ is a membership program for users of Aurora that provides a suite of valuable benefits, such as free transactions and the ability to earn multiple rewards by staking AURORA tokens.

Aptos

Aptos launched in October 2022 and deployed most of its DeFi projects during the fall of that year. Unlike the previous examples, the Aptos protocols below were launched during a bear market. Currently, there are three DEXs, two liquid staking tools, and a yield farming protocol with an overall TVL exceeding $1M.

Stage 1 — fall 2022 — DEXs, liquid staking:

• Liquidswap. Liquidswap was the first AMM to launch on the network and is now the largest on Aptos.
• AUX Exchange. AUX Exchange is a leading Aptos-native DEX by TVL and the second largest DeFi project on Aptos after PancakeSwap.
• Tortuga and Ditto. Tortuga and Ditto are liquid staking tools. Both issue APT tokens which allow users to stay staked whilst participating in the Aptos DeFi ecosystem.

Stage 2–2022 — PancakeSwap, lending:

• PancakeSwap. PancakeSwap deployed on Aptos in December 2022 and currently ranks #1 in terms of TVL.
• Aptin Finance. Aptin is a decentralized, non-custodial liquidity market protocol where users can participate as depositors or borrowers. Currently, this is the only lending product on Aptos.

A summary of these timelines can found in this table:

Source: DefiLlama

Given the current state of TON, we are most interested in analyzing late Phase 1 and early Phase 2.

What does this mean for TON?

Many of the DeFi protocols mentioned on other L1s were launched during a bull market whereas now it’s a crypto winter. Those protocols were heavily financed by VCs with large chunks of money spent on user acquisition, mostly through liquidity incentives.

This will not be the playbook on TON, at least in the near future.

It’s also important to keep in mind that from 2010–2021 the macro economy supported crypto because the risk-free interest rate was 0%. Today people can get 5% APY risk free on a bank deposit.

Hemi Weingarten — Founder and CEO of Mint.xyz, developers of the TonSwap DEX protocol.

Cryptocurrencies are often seen as a store of value and hedge against inflation. However, when interest rates are positive, investors may seek alternative investment options that offer a source of return, which can reduce demand for cryptocurrencies. Hypothetically, DeFi protocols could offer APYs that would be competitive against the risk-free rate. However, it remains unclear how these protocols will perform during aggressive rate hikes and so the future of these protocols remains unclear.

Nonetheless, considering the retrospective analysis above, we can clearly see the types of protocols that provide the largest shares of TVL right now, amidst the bear market and the overall decline of TVL in DeFi. We believe that it is important to pay attention to the projects that generate the most value for their respective chains, as this has direct implications for TON.

Apart from the positive interest rate environment, there are challenges specific to TON that we need to overcome. A few weak markers stand out:

• Low native token liquidity. It ensures high capitalization but can harm the reputation of the blockchain and token holders may struggle to cash out without causing a significant drop in the token’s value.
• Low TVL on the blockchain. Except for one DEX, NFTs and gaming, the blockchain’s utility is built around TVL (TVL refers to the amount of funds locked in any smart contract). If the TVL is low, the value for users is limited. Moreover, new user acquisition for the blockchain depends on its TVL in terms of the availability of sufficient liquidity on DEXs and bridges for traders to buy or bridge TON.
• Low on-chain activity that stays almost the same despite the 5x growth of addresses. It seems that TON attracts interest, but new addresses don’t have use cases for on-chain activity.

Comparison of key TON characteristics with other networks as of January 6, 2023:

Accounts vs activity on TON Blockchain as of January 6, 2023:

Sources: CoinGecko, DefiLlama, Tontech, PolygonScan, BscScan, The Block.

Additionally, The Open Network is not EVM-compatible, so the key Ethereum protocols (AAVE, Uniswap, Curve, etc.) are not expected to appear soon on the blockchain.

TON Blockchain provides great asynchronous architecture with great capabilities for future Web3 projects but, for the same reason, widespread adoption is slower than with EVM-compatible blockchains. Accumulated principles for blockchain project development could poorly be transferred to TON. At the same time, it open the window for those who are interested in scalable solutions.

Roman Degtiarev — DeFi expert

What should be built on TON now?

Considering everything thus far, we see reason to focus particularly on building core DeFi projects and taking measures to boost development incentives, user acquisition, and on-chain activity:

• DeFi infrastructure — a key product required for almost all DeFi projects, including new one-of-a-kind exchange solutions like GMX;
• Core DeFi projects — in particular, an overcollateralized stablecoin, lending protocol, and liquid staking protocol;
• Incentives for developers — including the creation of essential dev tools and attraction of new developers to the blockchain;
• TVM-EVM adoption tools — a hypothetical solution that could introduce an inflow of the current $50B TVL from EVM-like chains and may include running separate workchains.

DeFi protocols are the most impactful, and potentially activity-boosting, part of blockchain development. Given the current stage of TON Blockchain and the retrospective analysis above, we see reasons to focus on the following types of projects:

• Bridges. Existing DEXs use multiple standards for wrapped tokens, which negatively impacts the UX. TON needs a single standard for wrapped tokens.
• Decentralized stablecoins. Stablecoins make up a large share of DeFi swaps. Adding one to TON would significantly contribute to the TVL and trading volume. Centralized stablecoins have recently appeared on TON Blockchain through the Orbit Bridge, but the need for liquid decentralized stablecoins has not been satisfied. The reason for building decentralized stablecoins is not only to have a stablecoin but also to provide additional utility for TON tokens (that will act as collateral) and create new yield opportunities on the blockchain (lending, liquidations, arbitrage).
• Lending protocols. Projects like Aave on Polygon and Burrow on NEAR act as markets for interest-bearing assets and self-paying loans. They are among the most value-generating components of the DeFi ecosystems mentioned in the report and typically appear soon after the first DEX(s) get deployed. These protocols are known to be risky due to the number of smart contracts involved in the process, hence, reputation acts as a barrier to entry. Aave has been around for years and has a huge “safety fund” provided by stakers. Aave alternatives are yet to earn a similar reputation. There are currently no lending solutions on TON. Lending tools could boost the TVL and on-chain activity in tandem with stablecoins.
• DEX LOB (Limited Order Books) protocols. DEXs are widely represented on TON and competing with them alone would be hard enough. However, there are currently only Uniswap V2-like solutions on the market, and there is free space for Serum-like or GMX-like products.
• Liquid staking derivatives. Proof-of-Stake blockchains require the staking of native tokens to keep the network secure. The network rewards users who stake tokens, but these users sacrifice their liquidity by locking them in the contract. Liquid staking derivatives appear among the top DeFi projects in almost every chain considered in this report. For example, Marinade Finance leads by DeFi dominance in Solana, whilst Meta Pool is the second largest project in NEAR by DeFi dominance. In younger blockchains (such as NEAR or Aptos) liquid staking appears among the first DeFi projects that get deployed. However, this option is only feasible if there is a protocol for stTON yield farming. Some projects may also use a lending protocol with the staked coin to increase the APY even more. Hence, this option could amplify the value generation of a lending protocol, as well as improve the network’s security and create additional utility for TON tokens.

Within this list, lending protocols, along with DEXs, act as the first layer of DeFi, a starting point for the creation of other DeFi protocols. In addition, building a lending protocol on TON will be another reason for TON holders to put their tokens to work. The key lending protocols on other networks (AAVE on Ethereum, Trader Joe on Avalanche, Solend on Solana) are utilized by yield aggregators that boost the blockchain economy and create new use cases:

1. Leverage trading (using TON as collateral to buy more TON);
2. Auto compounding (similar to Yearn, mechanics with auto compounding to increase the APY);
3. Utilizing veTokenomics (Convex-like mechanics that provide maximal reward from the protocol but make vested tokens liquid).

Several factors signal a clear market opportunity for future lending protocols in TON:

• the market is empty, and there are no competitors yet;
• there is strong demand for lending and borrowing mechanics on TON that will boost the TVL and on-chain activity in tandem with stablecoins;
• there is a history of Ethereum best practices for building lending protocols with different limitations (like the absence of decentralized oracles);
• it is a simple, but highly profitable, business model.

The development of a strong foundation for DeFi protocols remains a priority: bridges and decentralized stablecoins are a base for future on-chain activity, liquidity, and development that should precede the deployment of the first lending protocol on TON.

The current state of The Open Network can be compared to a new island discovered by a traveler. It has gold deposits, but lacks the necessary infrastructure. To extract the gold, the island people must do the groundwork themselves, set up logistics, and find customers interested in their commodities. Translating this into blockchain language, The Open Network requires tools, initial TVL, and on-chain activity that will constitute a foundation for the next generation of developers and users.

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