Macauley Peterson

Starknet is stepping up efforts to attract bitcoin onto its layer-2 network. It’s rolling out a 100 million STRK incentive program alongside new staking mechanics in hopes to position the rollup as bitcoin’s “execution layer.”



The campaign, branded BTCFi on <a href="https://blockworks.co/tag/starkware">Starknet</a>, comes as rival projects <a href="https://blockworks.co/news/babylon-genesis-launch-l1-bitcoin-liquidity">Babylon</a> and <a href="https://blockworks.co/news/botanix-mainnet-evm">Botanix</a> pitch their own competing models for putting idle BTC to work. Babylon channels bitcoin into securing external proof-of-stake chains, while Botanix earlier this month launched stBTC, a vault that redistributes half of its gas fees — paid in bitcoin — directly to users.



Starknet’s pitch is different, according to Tom Brand, StarkWare’s head of product. Bitcoin stakers will help secure the <a href="https://blockworks.co/tag/rollups">rollup</a> itself.



Read more: <a href="https://blockworks.co/news/botanix-launches-stbtc">Botanix launches stBTC to deliver Bitcoin-native yield</a>



“Babylon focuses on staking <a href="https://blockworks.co/price/btc">BTC</a> to secure external [<a href="https://blockworks.co/tag/proof-of-stake">proof-of-stake</a>] chains, and Botanix builds an <a href="https://blockworks.co/tag/evm">EVM</a> chain on Bitcoin,” Brand told Blockworks. “Starknet, by contrast, lets BTC directly secure a real, high-throughput <a href="https://blockworks.co/tag/zero-knowledge-rollup">zk rollup</a> with active DeFi and BTCFi use, so staked <a href="https://blockworks.co/tag/bitcoin">Bitcoin</a> underpins real economic activity, not just theoretical security.”



For now, however, Starknet staking relies on wrapped assets such as <a href="https://blockworks.co/price/tbtc">tBTC</a>, <a href="https://blockworks.co/price/lbtc">LBTC</a>, <a href="https://blockworks.co/price/wbtc">WBTC</a> and <a href="https://blockworks.co/price/solvbtc">SolvBTC</a> rather than native bitcoin. That means users gain exposure via smart contracts on Starknet, but custody ultimately depends on the safety of wrapper infrastructure and cross-chain bridges.



“Staking is ‘trustless’ in the sense that users retain control via smart contracts on Starknet and do not hand BTC to a centralized custodian,” Brand said, acknowledging the “BTC is wrapped and bridged, introducing trust assumptions tied to the wrapper infrastructure and the bridge itself.”



There are other caveats. Unlike proof-of-stake systems where validators risk losing funds if they misbehave, Starknet’s BTC staking has no slashing mechanism today. “The architecture allows for slashing to be added in the future, but none is active now,” Brand said.



That hasn’t stopped Starknet from leaning into the bitcoin momentum. The Starknet Foundation’s six-month incentive program is meant to seed early liquidity around lending and yield strategies. Brand called it “a flywheel effect, helping with the most important use cases for bitcoin, lending and yield, and there to create momentum that will be self-sustaining.”



Botanix turns network usage itself into yield with sBTC. Users deposit bitcoin into a permissionless <a href="https://blockworks.co/tag/erc-4626">ERC-4626</a> vault on the Botanix EVM chain and receive stBTC, whose value rises due to the 50% of Botanix gas fees (paid in BTC) which are automatically redistributed to holders. Redemption is on-demand with no lockups, and the bitcoin is withdrawn back to Bitcoin directly, without relying on a centralized custodian or Ethereum.



Starknet in partnership with DeFi-native asset manager Re7 Capital, which curates many Ethereum DeFi vaults, will pursue yield through fund-style strategies (e.g., derivatives and curated DeFi) rather than protocol-level BTC fee flows.



Read more: <a href="https://blockworks.co/news/ethena-symbiotic-edge-over-eigen">Does Ethena portend a Symbiotic edge over Eigen?</a>



The bigger bet with the growing BTCfi space is that <a href="https://blockworks.co/news/bitcoin-defi-without-upgrades">bitcoin’s role as digital gold is insufficient</a>; a meaningful percentage of BTC holders don’t want it to be merely a passive store of value but rather an active asset <a href="https://blockworks.co/news/bitcoin-backed-stablecoins-liquity">to deploy in crypto-native markets</a>.



Whether holders will prefer Botanix paying out native bitcoin fees, Babylon selling security services to accrue fees in myriad tokens or Starknet staking its own claim for bitcoin DeFi at scale, remains to be seen.



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Starknet bids to make bitcoin productive with new BTCfi push

Aave Labs has released its official launch roadmap for V4, laying out the final steps ahead of the major upgrade’s Q4 mainnet launch.&nbsp;



Alongside new architectural and security improvements, the <a href="https://governance.aave.com/t/aave-v4-launch-roadmap/23134">roadmap</a> introduces a fundamental shift in how user balances are tracked and highlights a strategic pullback from economically underperforming deployments across <a href="https://blockworks.co/tag/layer-2-2">layer-2</a> and alternative layer-1 networks.



The V4 release moves away from aTokens’ rebasing-style mechanics toward <a href="https://blockworks.co/tag/erc-4626">ERC-4626</a>-style share accounting, a change that promises cleaner integrations, easier tax treatment, and better compatibility with downstream DeFi infrastructure.&nbsp;



In a recent technical development <a href="https://governance.aave.com/t/aave-v4-development-update/23043">update</a>, Aave Labs confirmed that “tokenization is to remain optional and built using ERC 4626 vaults,” and that internal accounting will eliminate the use of exchange rates or scaled balances. The goal is to “further improve the overall reliability of the protocol.”



ERC-4626 is a widely adopted <a href="https://blockworks.co/tag/ethereum">Ethereum</a> standard that expresses user deposits as shares of a vault rather than balances that grow over time. In <a href="https://blockworks.co/tag/aave">Aave</a> V3, aTokens accrue interest by increasing a user’s balance directly — behavior that resembles rebasing tokens and often confuses integrations and portfolio accounting tools.&nbsp;



By contrast, ERC-4626 tracks yield through a rising price-per-share metric, leaving token balances unchanged. The result is more predictable behavior for integrators, auditors and tax software, as well as a clearer cost basis for users.



The roadmap also outlines a series of release milestones, including a formal codebase publication, a public testnet launch with a redesigned interface, and the completion of a multi-layered security review involving formal verification and manual audits. Aave Labs said the roadmap reflects the protocol’s “final stages of review, testing, and deployment,” and that additional documentation and launch preparation materials will be released in the coming weeks.



But the most pointed strategic shift comes not from the codebase, but from Aave’s own governance forums.



<h2 class="wp-block-heading">“Aave revenue is made on Mainnet”</h2>



In a starkly worded “State of the Union” <a href="https://governance.aave.com/t/aave-dao-s-state-of-the-union-by-aci/23124">post</a> published by delegate Marc Zeller of the Aave Chan Initiative (ACI), the DAO signaled a clear intention to consolidate around Ethereum mainnet.



“At this point in time more than half of the Aave instances across L2s and alt-L1s are not economically viable,” Zeller wrote. “Based on YTD data, more than 86.6% of Aave revenue is made on Mainnet; it is now increasingly clear that everything else is a side quest.”



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">My Modus Operandi for the last years 1) Publish a clear plan on the Aave DAO forum with the why, the how, and the path 2) Most ignore it, some laugh and a few smear because I have not been nice to them or their bags. 3) Execute as announced 4) Aave wins Repeat&mdash; Marc ”七十 Billy” Zeller 👻 🦇🔊 (@lemiscate) <a href="https://twitter.com/lemiscate/status/1967956597118001236?ref_src=twsrc%5Etfw">September 16, 2025</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



The post goes further, noting that proposals will be submitted to wind down deployments that no longer make sense for the protocol’s bottom line.



“In light of this, the ACI has updated our doctrine toward new network deployments,” Zeller added. “Therefore, we will publish proposals in the near future, aiming to close down shop on underperforming networks.”



Blockworks reached out to Aave representatives for details, such as what metrics will determine which Aave deployments are to be deprecated, but didn’t hear back prior to publication.



The commentary reflects frustration within the Aave community about the “spray and pray” expansion tactics of 2021–2023, when protocols launched instances across dozens of chains to capture incentives, often with little sustained user activity or economic value.&nbsp;



While some deployments — particularly on Ethereum L2s like <a href="https://blockworks.co/tag/arbitrum">Arbitrum</a> and <a href="https://blockworks.co/tag/optimism">OP Mainnet</a> — have shown signs of growth, many others have remained dormant or thinly collateralized. With <a href="https://blockworks.co/tag/dao">DAO</a> resources stretched across audits, governance overhead, and service-provider budgets, the protocol appears to be tightening its scope ahead of the V4 release.



<figure class="wp-block-image size-large"><img loading="lazy" decoding="async" width="1600" height="889" src="https://blockworks-co.imgix.net/wp-content/uploads/2025/09/image-129.png?w=1024&amp;h=1024" alt="" class="wp-image-107966" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2025/09/image-129.png?w=1600 1600w, https://blockworks-co.imgix.net/wp-content/uploads/2025/09/image-129.png?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2025/09/image-129.png?w=1024 1024w, https://blockworks-co.imgix.net/wp-content/uploads/2025/09/image-129.png?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2025/09/image-129.png?w=1536 1536w, https://blockworks-co.imgix.net/wp-content/uploads/2025/09/image-129.png?w=428 428w, https://blockworks-co.imgix.net/wp-content/uploads/2025/09/image-129.png?w=470 470w, https://blockworks-co.imgix.net/wp-content/uploads/2025/09/image-129.png?w=389 389w, https://blockworks-co.imgix.net/wp-content/uploads/2025/09/image-129.png?w=80 80w" sizes="auto, (max-width: 1600px) 100vw, 1600px" /><figcaption class="wp-element-caption">Aave weekly revenue over the past year | Source: <a href="https://blockworks.com/analytics/application-comparison">Blockworks Research</a></figcaption></figure>



The roadmap also dovetails with broader economic planning within the DAO. ACI estimates Aave’s annual net protocol revenue at around $130 million — even with the protocol controlling a dominant share of DeFi lending. Roughly 80–95% of gross lending revenue is returned to liquidity providers, leaving the DAO with narrow operating margins. This has prompted a renewed focus on more profitable verticals like <a href="https://blockworks.co/news/umbrella-reshapes-aave-staking">GHO</a>, Aave’s native stablecoin, where the protocol itself earns the spread by acting as the sole liquidity provider.



For service providers and tokenholders, the V4 launch represents a clean break. The shift to ERC-4626 removes a major accounting complexity from aTokens and aligns Aave with standards already used by protocols like Yearn, Beefy and Pendle. Meanwhile, the governance direction makes clear that “more chains” is no longer synonymous with growth. Instead, the DAO is doubling down on Ethereum mainnet and a small set of strategically differentiated deployments.



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Aave

Aave V4 roadmap signals end of multichain sprawl

YO, short for Yield Optimizer, launched a yoEUR vault on Friday, adding fresh momentum to the euro stablecoin trade. But market infrastructure still lags behind. Cross-chain liquidity for Circle’s EURC is limited, causing distortions in interest rates on borrow and lending markets not seen with larger USD-pegged stablecoins.



yoEUR is a <a href="https://blockworks.co/tag/multichain">multichain</a> yield vault designed to optimize returns on EURC. Like YO’s earlier offerings, covering ETH, BTC and USD, the vault allocates capital across multiple chains and strategies using a risk-adjusted framework.



The “yoTokens implement the <a href="https://blockworks.co/tag/erc-4626">ERC-4626</a> tokenized vault standard, with key additions to support a multi-chain architecture,” YO Labs CEO Driss Benamour told Blockworks. “YO deposits are currently on <a href="https://blockworks.co/tag/base">Base</a>, with one-click deposits supported from multiple chains, including <a href="https://blockworks.co/tag/arbitrum">Arbitrum</a>, via integrated routing and bridging. YO actively harvests yields across multiple chains, including <a href="https://blockworks.co/tag/ethereum">Ethereum</a>, Base, and <a href="https://blockworks.co/news/unichain-mainnet-is-live">Unichain</a>, with Arbitrum coming soon.”



Asked about visibility into yield positions, Benamour said: “All YO strategies are fully transparent and accessible on the dApp…Users can always track exactly where their assets are allocated via the dApp.”



The launch comes as euro-denominated stablecoins inch further into the DeFi spotlight, thanks to a dollar weakness. The greenback has been ranging over the summer, but is down roughly -12% against the euro year-to-date.



On Solana’s <a href="https://blockworks.co/podcast/lightspeed/3274fdb8-7f13-11f0-b217-8b38893dcf35">Jupiter Lend</a> kicked off <a href="https://x.com/kashdhanda/status/1963135217738149902">a two-month</a> incentive program pushing posted EURC APYs above 7%.



Aave founder Stani Kulechov has repeatedly <a href="https://x.com/StaniKulechov/status/1956645156762820709">promoted</a> ~5% lending yields on EURC via Aave deployments on Base and Ethereum that support EURC.



But the euro carry trade remains fragmented. On Aave v3 Ethereum, borrow rates for EURC briefly spiked to nearly 20% around 6:00 a.m. ET Friday before falling below 8% by 11:00 a.m. — a textbook case of what happens when a tightly capped market brushes up against Aave’s interest rate “kink.” Once utilization crosses a certain threshold, even small net borrows can send rates soaring until new supply arrives.



<figure class="wp-block-image size-large"><img loading="lazy" decoding="async" width="1600" height="845" src="https://blockworks-co.imgix.net/wp-content/uploads/2025/09/image-45.png?w=1024&amp;h=1024" alt="" class="wp-image-107272" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2025/09/image-45.png?w=1600 1600w, https://blockworks-co.imgix.net/wp-content/uploads/2025/09/image-45.png?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2025/09/image-45.png?w=1024 1024w, https://blockworks-co.imgix.net/wp-content/uploads/2025/09/image-45.png?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2025/09/image-45.png?w=1536 1536w, https://blockworks-co.imgix.net/wp-content/uploads/2025/09/image-45.png?w=428 428w, https://blockworks-co.imgix.net/wp-content/uploads/2025/09/image-45.png?w=470 470w, https://blockworks-co.imgix.net/wp-content/uploads/2025/09/image-45.png?w=389 389w, https://blockworks-co.imgix.net/wp-content/uploads/2025/09/image-45.png?w=80 80w" sizes="auto, (max-width: 1600px) 100vw, 1600px" /><figcaption class="wp-element-caption">Source: <a href="https://aavescan.com/ethereum-v3/eurc">Aavescan.com</a></figcaption></figure>



In theory, borrowers could arbitrage the spread — borrow where liquidity is cheap (e.g., Base) and lend where it’s scarce (mainnet). But in practice, bridging friction kills the trade. Unlike USDC, EURC lacks a native <a href="https://bridg.sh/?to=ethereum&amp;from=base">CCTP-style</a> burn-and-mint bridge, so most flows rely on swap-and-bridge routes or CEX rails.



Portal (Wormhole’s token bridge) has been <a href="https://x.com/wormhole/status/1959964316968640921">promoting</a> EURC bridging between chains following its August launch, but even at a modest €10,000 size, transfers from Base to <a href="https://blockworks.co/tag/solana">Solana</a> clock in at ~33 bps, and Solana to Ethereum via Portal at ~49 bps. Base to Ethereum EURC bridges can be done for a more modest ~22 bps per via <a href="https://blockworks.co/news/squid-upgrade-cross-chain-abstraction">Squid router</a>.



All of these spreads will increase with size, of course, making it difficult to bring rates in line without relying on, for example, Coinbase as an intermediary.



But this can be an advantage for the little guy with capital already in place on these chains. Jupiter’s boost lifts APYs on Solana, but the cost to move funds in and out quickly discourages hedge-fund scale operations. Aave’s mainnet spikes tend to be driven by caps and a small number of large wallets, not durable demand. Risk curator Chaos Labs has <a href="https://governance.aave.com/t/chaos-labs-risk-stewards-increase-supply-and-borrow-caps-on-aave-v3-08-14-25/22934">twice moved</a> to raise the caps on EURC specifically on Aave’s core instance.



A vault that rotates between chains and strategies can theoretically harvest what individual users can’t.



“The euro is one of the most widely traded currencies in the world,” Benamour said. “With yoEUR, we’re unlocking the best DeFi yield for euro-denominated stablecoins, making it easy for anyone to earn more on their assets.”



As of today yoEUR is principally allocated to <a href="https://x.com/yeluacaM/status/1959729262765723887">Tokemak’s baseEUR vault</a> for which yields are boosted by <a href="https://blockworks.co/price/toke">TOKE</a> token emissions. That would make it appealing to users who don’t want to be bothered with, or gain a tax benefit from avoiding, having to claim rewards. There can also be advantages in terms of risk management, with both concentration risk mitigated and a confidence boost from risk ratings by Exponential.



Euro stablecoins in aggregate now top $540 million in <a href="https://www.coingecko.com/en/categories/eur-stablecoin">market cap</a>. But until native cross-chain mobility arrives, and money market caps scale up, expect rates to stay weird.



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erc-4626

Euro stablecoin push runs into thin liquidity

Cap Labs’ new stablecoin cUSD has seen rapid adoption since launch, climbing to $67.85 million in circulation over the past week, <a href="https://defillama.com/stablecoin/cap-cusd">according</a> to DefiLlama.&nbsp;



Etherscan <a href="https://etherscan.io/token/0xcccc62962d17b8914c62d74ffb843d73b2a3cccc">shows</a> 2,735 holders of the token to date. The jump signals strong demand for Cap’s yield-layered digital dollar model, which combines regulated reserve assets with EigenLayer-powered credit underwriting.



Built atop the newly launched Cap Stablecoin Network (CSN), cUSD is designed as a 1:1 redeemable stablecoin backed by assets like <a href="https://blockworks.co/tag/paypal">PayPal’s</a> <a href="https://blockworks.co/price/pyusd">PYUSD</a>, <a href="https://blockworks.co/tag/blackrock">BlackRock</a>-managed <a href="https://blockworks.co/news/buidl-collateral-tokenization">BUIDL</a>, and <a href="https://blockworks.co/tag/franklin-templeton">Franklin Templeton’s</a> BENJI. The yield-bearing version stcUSD — minted by staking cUSD — is enabled by a three-party system of lenders, operators, and restakers.



Cap’s core innovation lies in its structure: operators borrow stablecoins to deploy yield strategies, restakers underwrite the operator’s credit risk, and lenders (stcUSD holders) earn a floating yield, currently around 12%, depending on market demand and operator performance. While restaker collateral provides protection against operator default, stcUSD holders are still exposed to fluctuating yield dynamics.



<figure class="wp-block-image"><img decoding="async" src="https://lh7-rt.googleusercontent.com/docsz/AD_4nXcu_7EBXZi3VItlG_gUlP9ZdT_spy2QXjOEzbUMHu7GkZFHRrKyJZ9-tlygRXK5q_omNcVAeG6WuoQ6iSAgmzzZFOSBYsP0chFvaZY1O5vP7YJeK2iehw-MHotrGOt4ZVsJb5OyEA?key=1HSKtor9sNS05yY8kpZnCg" alt=""/><figcaption class="wp-element-caption">cUSD’s impressive growth; Source: <a href="https://defillama.com/stablecoin/cap-cusd">DefiLlama</a></figcaption></figure>



Unlike many past stablecoin launches, Cap’s model is carefully tuned to comply with the <a href="https://blockworks.co/tag/genius-act">GENIUS Act</a>, the sweeping US stablecoin legislation that prohibits interest-bearing payment tokens. Speaking at the Stablecoin Summit in Cannes <a href="https://youtu.be/fxd5wXtAaC8?si=45kDRI1mmi8Zt56U">in June</a>, Cap Labs founder Benjamin Lens was blunt:



“They said no yield, and it’s pretty clear — there’s no way around it. They do not want stablecoins giving yield to retail investors,” Lens said.



Thus, stcUSD is a separate <a href="https://blockworks.co/tag/erc-4626">ERC-4626</a> vault token, which users can mint by staking cUSD. The yield is generated through a marketplace of borrowing and restaking, not directly from Cap Labs.



“Genius Act covers companies that are generating yield on behalf of users and giving them to the users,” Lens said in Cannes, whereas Cap is “an immutable open protocol like <a href="https://blockworks.co/tag/ethereum">Ethereum</a>, like Bitcoin.”



Combined with the fact that the percentage of any one stablecoin backing cUSD is limited to 40%, Lens thinks they have a compliant mechanism. “This is the standard that we&#8217;ve agreed to with Templeton and BlackRock for our integration with them,” Lens told Blockworks, noting it’s the same arrangement that UStB (from Ethena) made in partnership with BlackRock.



<h2 class="wp-block-heading">Restaking evolution</h2>



Cap’s design aligns with a trend emerging with restaking platforms such as <a href="https://blockworks.co/tag/eigenlayer">EigenLayer</a> and Symbiotic: the financialization of Actively Validated Services (AVSs). Traditionally, AVSs on EigenLayer offered infrastructure services — like oracles or bridges — with risk limited to uptime or correctness. But a new wave of AVSs is using EigenLayer to underwrite financial guarantees.



Cap is one example highlighted by EigenLayer founder Sreeram Kannan. “A staker can stake and promise that an operator [like Susquehanna] is going to make a 10% APR,” Kannan told Blockworks. “You can underwrite financial risk using EigenLayer, which is a very new kind of risk, which requires much, much more active curation and monitoring,” he said.



What makes this possible is EigenLayer’s recent rollout of a new feature, complementary to slashing, which <a href="https://blockworks.co/news/restaking-use-cases-reframed">went live in April</a>.&nbsp;



While slashing enables restakers to be penalized for backing underperforming operators, <a href="https://docs.eigencloud.xyz/products/eigenlayer/concepts/slashing/redistribution">redistribution</a>, launched in late July, allows slashed funds to be redirected back to the impacted AVS — such as Cap’s lending vault — rather than burned.



That change turns EigenLayer into a programmable risk distribution layer, capable of enforcing structured finance contracts entirely onchain.



“With financial AVSs, slashing is the core logic,” Kannan said. “A liquidation is an example — if the hurdle rate is not met — slash and move the money out.” That’s easier than slashing some infrastructure AVSs like a ZK or TEE coprocessor, where it’s harder to adequately express the slashing logic onchain, he added.



The early growth of cUSD “highlights demand for stable, compliant dollars backed by decentralized risk management,” according Misha Putiatin, co-founder of Symbiotic, which also provided infrastructure underlying Cap’s real-time credit risk coverage.



“This marks an important step toward programmable DeFi where anyone can transparently launch, underwrite, and manage new financial primitives,” Putiatin told Blockworks.



According to a research note from Serenity Research and Catalysis <a href="https://serenityresearch.substack.com/p/serenity-premium-cap-money-and-cusd">published</a> Sunday, Cap’s model resembles a CDS-like structure: Restakers sign off-chain legal agreements to cover operator defaults, post collateral onchain, and are liquidated if their guarantee fails. Cap currently lists market makers like Fasanara, GSR, and Amber as operators, with Gauntlet and <a href="https://blockworks.co/tag/symbiotic">Symbiotic</a> restakers providing credit protection.



Cap Labs’ operating company, which handles smart contracts, social media and frontend, is based in Panama, Lens said.



“There are currently no plans to geofence the US. Since we&#8217;re functionally an autonomous, overcollateralized lending market, we&#8217;re taking a similar precedent to <a href="https://blockworks.co/tag/aave">Aave</a> and <a href="https://blockworks.co/analytics/morpho">Morpho</a>,” he said.



As Cap’s model gains traction, it could preview a broader shift in the restaking ecosystem: from securing infrastructure to enabling onchain credit underwriting, with slashing and redistribution forming the enforcement rails for next-gen financial AVSs.



Updated Aug. 26, 2025, at 10:05 am ET: Added comment from Symbiotic.



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EigenCloud

Cap Labs attracts capital with EigenLayer-backed credit model

This is a segment from the 0xResearch newsletter. To read full editions, <a href="https://blockworks.co/newsletter/0xresearch" target="_blank" rel="noreferrer noopener">subscribe</a>.



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Aave’s new Umbrella staking system <a href="https://x.com/aave/status/1930630754255479080">went live</a> yesterday, replacing the protocol’s once-theoretical insurance model with an onchain, automated safety net tied directly to individual assets.&nbsp;



The USDC and USDT vaults <a href="https://app.aave.com/staking/">currently</a> have yields greater than 10% on offer. But for <a href="https://blockworks.co/news/aave-stablecoin-gho-mainnet-launch">GHO</a> — <a href="https://blockworks.co/tag/aave">Aave’s</a> bespoke <a href="https://blockworks.co/tag/stablecoins">stablecoin</a> — a mismatched reward structure is creating an odd dynamic for GHO holders in search of yield.



Since 2020, Aave’s Safety Module (SM) has served as a kind of backstop — stkAAVE and AAVE-ETH LPs (stkABPT) could be slashed in theory, but governance votes and political incentives meant that slashing never occurred — even after <a href="https://blockworks.co/news/aave-curve-exposure">bad debt events</a> like the 2022 Curve exploit. With Umbrella, Aave introduces an autonomous mechanism that slashes stakers in real time once bad debt in a particular asset exceeds a preset threshold.



The goal: make Aave’s insurance fund more credible, capital-efficient and aligned with real user behavior.



<h2 class="wp-block-heading">How Umbrella works</h2>



Each Umbrella vault is an <a href="https://blockworks.co/tag/erc-4626">ERC-4626</a> strategy for staking yield-bearing assets like Aave-deposited USDC, USDT and ETH, or by staking GHO. Users stake their token and earn both the underlying lending APY and an additional “Safety Incentive” stream. Rewards follow an S-shaped curve, with peak emissions at the vault’s “Target Liquidity” and tapering off above or below.



If a shortfall occurs, the protocol automatically burns the same asset from its vault after a configurable “first-loss offset” (currently 100,000 units per asset). There is no governance vote, no auction and no delay.



Like the legacy module, staked tokens remain locked for 20 days once withdrawal is requested, with a two-day window to exit.



<h2 class="wp-block-heading">Migration: New names, new risks</h2>



The shift to Umbrella brings some changes for existing stakers:



<ul class="wp-block-list">
<li>stkAAVE and stkABPT remain active, but with slashing disabled. They now serve primarily as governance power with residual yield.</li>



<li>stkGHO, a staking vault introduced last year, was automatically migrated into a new token: sGHO. Slashing risk and cooldowns were removed, but Aave’s <a href="https://blockworks.co/news/aave-rewards-program-airdrop">Merit program</a> continues to stream rewards — currently ~7% APY.</li>



<li>A new stkGHO-Umbrella vault was launched for those willing to take on slashing risk.</li>
</ul>



Umbrella’s stkGHO deposits currently earn a ~5% APY — lower than the risk-free sGHO. That’s sparking user complaints and a governance forum discussion. Here’s the status quo:



<figure class="wp-block-table"><table class="has-fixed-layout"><tbody><tr><td>Token</td><td>Liquidity</td><td>Slashing</td><td>Cooldown</td><td>APY (as of June 6)</td><td>Funding</td></tr><tr><td>sGHO</td><td>Instant</td><td>None</td><td>None</td><td>~7%</td><td>Merit/ASR</td></tr><tr><td>stkGHO</td><td>20d lock</td><td>Up to 100%</td><td>Yes</td><td>~5%</td><td>Umbrella emissions</td></tr></tbody></table></figure>



Due to overfunding of the GHO vault and absent a redirection of Merit rewards, stkGHO currently earns less than its risk-free counterpart.&nbsp;



But the opportunity in sGHO will be short-lived. Aave Improvement Proposal (AIP) drafts are circulating to fix this by either shifting Merit rewards or raising the vault’s emissions cap.



<h2 class="wp-block-heading">Assessing the risks</h2>



Umbrella introduces a higher probability of slashing compared to the legacy SM, since there’s no governance barrier. But the scope of slashing is narrower: You only lose funds if there’s bad debt in the specific asset you’ve staked, and only above the offset buffer.



Compared to holding AAVE (a volatile token backing generalized risk), staking stablecoins in Umbrella offers a more targeted risk-return profile. Still, liquidity lock-ups and smart contract risk remain.



Stakers chasing yield can rotate into under-target vaults (waUSDT or waWETH) for better APY. GHO holders could opt for sGHO now and switch over to stkGHO once the emissions patch lands.



Umbrella deployments on L2s are also on the roadmap. Long term, the legacy Safety Module may be retired entirely.



For now, Umbrella marks a shift from “opt-in protection” to credible, real-time insurance — a more tailored approach to putting staker skin in the game.



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Umbrella reshapes Aave staking

Bessie Liu

Lending platform Euler will be launching Euler v2 in the second quarter of this year, making an anticipated return following an unfortunate $200 million exploit last year.



Euler v2 introduces a modular design, different from its predecessor. It includes the Euler Vault Kit (EVK), allowing developers to tailor lending vault designs, and the Ethereum Vault Connector (EVC), a tool for linking ERC-4626 vaults with various smart contracts.



In an interview with Blockworks, Euler’s co-founder Michael Bentley noted that v2 of Euler will have “a lot more adaptability, freedom and flexibility for users than it ever had on v1.”



Read more: <a href="https://blockworks.co/news/euler-suffers-200m-exploit">Euler suffers $200M exploit in flash loan attack</a>



“With this modular lending system of vaults, what we allow users to do is create these kinds of decentralized, permissionless, noncustodial credit markets themselves, and they can create risk-reward tolerance that is right for them and for their users,” Bentley said.



Bentley explained that an interesting feature of Euler v2 would be the ability for users to tap into pre-existing vaults from elsewhere in the Euler ecosystem.



“You can use collateral that already has deposits in it when you create a new lending and borrowing vault,” Bentley said. “Euler vaults allow people to lend out their collateral while they’re using it as collateral — this is called rehypothecation — and allows for a lot more capital efficiency for lenders.”



The public codebase for EVC has been live since January and has been extensively audited with a $200,000 bounty prepared for those who can spot bugs. The EVK codebase is currently going through a round of <a href="https://blockworks.co/tag/audit">audits</a>, with a formal verification and security review expected to follow, Bentley said.



Read more: <a href="https://blockworks.co/news/crypto-hackers-bug-bounties">Helpful hackers net more than $640k in 1 year with crypto bug bounties</a>



Euler v2 had been in the works long before the exploit in March last year. Bentley noted that the deployment of Euler v1 taught the team valuable lessons. Noting that the protocol lacked flexibility and was dependent on a single governance model that wasn’t scalable.



It is still uncertain how Euler will relaunch v2 and incentivize users to be onboarded back onto its protocol. Bentley notes that the Euler community governance is in the process of determining these next moves.



“All of our governance is just coming back to life, it’s been a little bit dormant as you might expect given what happened last year, but it’s getting fired up again now,” he said.



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How Euler Finance made its comeback after $200M exploit

A new Ethereum Improvement Proposal, or EIP, aims to introduce asynchronous deposit and redemption flows as an extension to the existing ERC-4626 tokenized vault standard.



ERC-4626 itself is a standard designed to introduce parameters for yield-bearing vaults. These vaults are smart contract platforms that execute strategies, providing rewards for the token depositor.



The standard, though, is designed to ensure that the vaults are atomic, meaning that swaps have a deposit and redemption limit. Another way to explain atomic vaults would be “all or nothing” — If X happens, Y must happen at the same time. 



Read more: <a href="https://blockworks.co/news/tokenized-vault-ethereum-erc-4626">Tokenized vaults see steady deployments after ERC-4626 adoption</a>



In an interview with Blockworks, Asad Khan, a DeFi politician at Centrifuge, explains that with atomic transactions, a user who deposits something to lend immediately receives a token that represents what they share.



EIP-7540, in this instance, would ensure that asynchronous deposits and redemption flows are possible.&nbsp;



This EIP has the potential to benefit protocols that deal with real-world assets (RWAs), cross-chain lending and liquid staking, according to Khan.



“The asynchronous request is you deposit a token, and you may not get the token back until the request is complete later on, this can be based on a number of parameters,” Khan said.



An example of an asynchronous request would be, if X happens, Y can only happen under the conditions that Z is met.&nbsp;



In this case, X could be a lender who deposits collateral into a pool, Y would be the share that the lender receives only after Z, a borrower, actually borrows money from the pool.



As it currently stands, Khan explains, every RWA protocol has to deal with its own unique off-chain processes. The purpose of EIP- 7540, would be to standardize how protocols can handle these on and off-chain transactions.&nbsp;



Asynchronous transactions could potentially lead to greater security risks, however. ERC-4626 vaults have been designed to be atomic to prevent one party from controlling multiple assets at the same time.&nbsp;



Jeroen Offerijns, Centrifuge&#8217;s chief technology officer and co-author of EIP-7540, told Blockworks that asynchronous deposit and redeem flows are inherently more complex than atomic flows when it comes to implementation because of the additional state transitions that are required.&nbsp;



“More attention should be to extensive testing of the flows, and auditing of any asynchronous vault implementation,” Offerijns said. “Standardizing can help by creating reusable property test suites, similar to what has been developed for ERC-4626.”



Read more: <a href="https://blockworks.co/news/tokenized-vault-standard-ethereum">Tokenized Vault Standard on Ethereum Set to ‘Kick Off New DeFi Summer’</a>



Offerijns noted that asynchronous flows will add pressure to protocols that must ensure an execution of a request operates fairly. Offerijns added that Cenfrigue has built an epoch mechanism that can bundle orders and even the playing field for requests and protect against frontrunning.&nbsp;



EIP-7540 is still in its early stages. The proposal must first be discussed on the <a href="https://ethereum-magicians.org/t/eip-7540-asynchronous-erc-4626-tokenized-vaults/16153/2">Ethereum Magicians</a> forums before moving onto next stages.&nbsp;



“Once consensus has been reached, the proposal will move to review, last call and in the end a final stage, at which point it is accepted,” Offerijns said.



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A new EIP aims to revamp the tokenized vaults standard for RWAs

Tokenized real world assets such as homes and private credit are a trending topic in the blockchain technology space, seemingly poised to become the next major narrative.&nbsp;



Earlier this month, a handful of companies in the industry banded together to form the Tokenized Asset Coalition (TAC), including Aave, Circle and Coinbase. Beyond creating educational content and building the necessary infrastructure to bring different types of assets on-chain, the coalition is also looking at developing relevant, compliant principles to drive the adoption of blockchain technology.&nbsp;



Blockworks sat down with Centrifuge founder Lucas Vogelsang at Permissionless II to learn about some of the necessary standards and regulatory hurdles such as know-you-customer (KYC) laws that need to be developed in order to bring <a href="https://blockworks.co/news/real-world-assets-empire-buzzwords-defi">tokenized assets onto the blockchain</a>.



<hr class="wp-block-separator has-alpha-channel-opacity"/>



Blockworks: Could you tell me a little bit about how the tokenized asset coalition came to be and what it is trying to achieve?



Vogelsang: In 2018, there was this telegram group called “DeFi,” just decentralized finance, and it was really just a group of people looking at how to build financial products on-chain. At that time we barely had any crypto infrastructure, but the idea was that if you could create a token, and that token could be used in your DeFi protocol, and it becomes composable then you are building this new financial system.&nbsp;



Those people coming together and working on it just sped up the industry so much. One of the things that came out of that was DeFi Summits, for example. I saw firsthand how much the financial system is an ecosystem of many different participants and how you make it so much faster if you improve collaboration.&nbsp;



With TAC, what we’re trying to build is a marketplace or a whole ecosystem. The better we can standardize and work together, the faster the whole industry will reach an escape velocity and actually be able to compete.&nbsp;



Blockworks: What are some standards the TAC is looking into?&nbsp;



Vogelsang: I think <a href="https://blockworks.co/tag/kyc">KYC</a> will be one of the standardizations that will come sooner or later. KYC credentials today aren&#8217;t really portable, and real-world asset DeFi will have to be KYC’ed and we will have to figure out how we actually work together on this.&nbsp;



Another one that I’m personally very interested in, and not really an active TAC project, is the 4626 tokenized vaults standard. If you think about most of these real-world asset pools, the problem is that many of them are incompatible with 4626 because 4626 is atomic. So, if you want to redeem shares, in the same transaction, you immediately get the underlying collateral or pool asset back, but this is not the case for RWAs. So we’re figuring out a way to see if we can come up with an extension that is more compatible with RWA projects so that if you want to provide liquidity or invest in any of these kinds of things, you can do so.



Blockworks: What is the value of having RWAs on-chain?



Vogelsang: The biggest value prop of <a href="https://blockworks.co/tag/real-world-assets">RWAs</a>, well I think there are two. There’s making the creation of these assets more efficient because you have instant settlement, a single source of truth on-chain that different service providers can use and you don’t have to send spreadsheets back and forth.&nbsp;



The other thing that is part of this whole RWA narrative for me is creating better market infrastructure. So once you have these assets on-chain, you can trade it more efficiently, you can borrow against it in an automated way. But you have to have to start with the <a href="https://blockworks.co/tag/tokenization">tokenization</a> part because, without these assets, there’s nothing to do.&nbsp;



Where this journey is going now, and this is where it gets exciting, is when you have 10x improvement over [traditional finance]. Ultimately, people don’t care about having these assets as a token if it doesn’t give them a better experience. If you just save a little bit of fees per year because the tokenization process is a bit cheaper than the [traditional finance] securitization process, sure that’s cool, but it’s not nearly as cool as if you can take an asset today that is illiquid, and you buy a tokenized version of it that’s liquid, because the market infrastructure is actually better on-chain and more efficient.&nbsp;



Blockworks: Could you tell me a little more about these illiquid assets in the real world that you think can be liquid on-chain? Would it be something like properties or houses?



Vogelsang: There are a lot of people in the crypto native world experimenting with marketplaces for non-fungibles, effectively, making a house liquid requires the same thing — we need to figure out a way for a liquid market to exist for non-fungible assets, real-world assets, but I think that is going to come later because it’s still a pretty hard problem.&nbsp;



If you look at fungible assets, such as private credit, the reason why it’s called private credit is because it’s not publicly traded. It is not an open public market because those assets are too hard to make liquid on the New York Stock Exchange.&nbsp;



If we can build a more efficient market infrastructure for these assets, we can turn them from private credit assets to public credit assets. All of these assets have a huge illiquidity premium right now because they are more expensive to finance. So when you can take these assets that are too small or too complicated to make liquid, and you move it to the right on the spectrum, that’s when you will start building something really powerful because now all these assets become liquid.



That’s why when I think of standardization efforts, focusing on creating the infrastructure needed for that to happen is really the biggest unlock for real-world assets.



This interview has been edited for brevity and clarity.



Updated Oct. 5, 2023 at 11:55 am ET: Clarified for additional context.



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Standardization coming for real-world assets ‘sooner or later’: Q&A with Centrifuge CEO

Following the introduction of ERC-4626, tokenized vault deployments have remained steady.



ERC-4626 is a standard that is designed to introduce implementation techniques and parameters for yield-bearing vaults in crypto. The standard was introduced in early May.



<a href="https://dune.com/queries/2641987/4389806">Data</a> compiled by Dragonfly data scientist Hildebert Moulié shows that every week following the introduction of ERC-4626, over 50 tokenized vault deployments have occurred across EVM-compatible blockchains.&nbsp;



<figure class="wp-block-image"><img decoding="async" src="https://lh6.googleusercontent.com/ENb3fIooPdyQRszYXFkclInEJMDT5OImDj960O-GbJ0-J3sLyeQsQI3-GJOhR6GRnVN_3CVkhOXhOT7QPIpxpfvEMy9PHmQ--WxhGL8CG49KSE4ju6fp5CaiEMOMXX1IHt2ksCyeW_EXBgTs5b9PDgw" alt=""/></figure>



In a previous interview with Blockworks, Superform co-founder Blake Richardson contended that this new standard would be as important to DeFi as ERC-20 — a commonly used token standard — is to the <a href="https://app.blockworksresearch.com/glossary#initial-coin-offerings-icos">ICO boom</a>.



Read more: <a href="https://blockworks.co/news/tokenized-vault-standard-ethereum">Tokenized vault standard on Ethereum set to ‘kick off new DeFi summer’</a>



“I think the compound benefit of standardization will lead more people to adopt DeFi because they can start to trust it more,” Richardson said.



To a certain extent, Richardson was right. Although tokenized vaults already existed before ERC-4626, it wasn’t until these principles were introduced that their implementations became more consistent.



Prize savings protocol PoolTogether was one of the most recent to make use of the standard. PoolTogether revealed during a private beta launch that v5 of its protocol introduces the permissionless use of any token that has a 4626 yield source.&nbsp;



Users can deposit tokens into PoolTogether’s standard ERC-4626 vault in order to win prizes or customize their own vault. These vaults will create yield and liquidate the yield into POOL tokens, the protocol’s native asset, reflecting the vault’s likelihood of winning a prize.



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Tokenized vaults see steady deployments after ERC-4626 adoption

If you start dropping references to &#8220;Ethereum request for comment” in polite conversation, you can expect some blank stares. But sometimes innocuous technical lingo like ERC-20 (tokens) and ERC-721 (NFTs) can become the crypto-equivalent of a household name.



Proponents of the tokenized vault standard ERC-4626 — specifically those in the advocacy group 4626 Alliance which announced an expansion to 11 members Thursday — hope that this little pull request, finalized in March 2022 will find its place in a future ERC hall of fame.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">1/🌟 The 4626 Alliance is thrilled to announce a stellar lineup of new members joining forces to propel the ERC-4626 standard: <a href="https://twitter.com/yearnfi?ref_src=twsrc%5Etfw">@yearnfi</a>, <a href="https://twitter.com/fraxfinance?ref_src=twsrc%5Etfw">@fraxfinance</a>, <a href="https://twitter.com/sommfinance?ref_src=twsrc%5Etfw">@sommfinance</a>, <a href="https://twitter.com/AlchemixFi?ref_src=twsrc%5Etfw">@AlchemixFi</a>, <a href="https://twitter.com/Blockworks_?ref_src=twsrc%5Etfw">@Blockworks_</a>, <a href="https://twitter.com/MorphoLabs?ref_src=twsrc%5Etfw">@MorphoLabs</a>, and <a href="https://twitter.com/joey__santoro?ref_src=twsrc%5Etfw">@joey__santoro</a> <a href="https://t.co/vgTl4fs1Rq">pic.twitter.com/vgTl4fs1Rq</a>&mdash; 4626 Alliance (@erc4626) <a href="https://twitter.com/erc4626/status/1654121022201950208?ref_src=twsrc%5Etfw">May 4, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Disclosure: Blockworks is among the members of the 4626 Alliance.



The standard was first <a href="https://eips.ethereum.org/EIPS/eip-4626">proposed</a> by <a href="https://blockworks.co/tag/fei-protocol">Fei</a> co-founder Joey Santoro in late 2021. Within months, it sparked the <a href="https://twitter.com/joey__santoro/status/1504603906726240258">interest</a> of developer teams from major DeFi protocols such as Balancer, <a href="https://blockworks.co/tag/yearn-finance">Yearn</a> and <a href="https://blockworks.co/tag/frax">Frax</a>.



That prompted Blake Richardson and Vikram Arun, co-founders at Superform, to champion the standard, forming the 4626 Alliance alongside mStable, Balancer and Aztec.



“Our thesis is that 4626 creates the new DeFi summer,” Richardson told Blockworks. He predicts it will be as important as the ERC-20 token standard that led to <a href="https://www.blockworksresearch.com/glossary#initial-coin-offerings-icos">the ICO boom</a>.



<h2 class="wp-block-heading">DeFi’s “ERC-20 moment”</h2>



To date, DeFi has failed to be adequately composable and easy to understand, and has suffered from security risks as a result of a lack of standards, Richardson said. Projects have been forced to author bespoke adapters in order to link up with each other, adding complexity and time to deploy dApps safely.&nbsp;



“Instead of all these isolated groups of people building things that don’t interact with each other, we can build entirely unique composable projects,” Richardson said.



One example is Sommelier — also a member of the 4626 Alliance — which <a href="https://blockworks.co/news/defi-multichain-sommelier-axelar">announced its launch on Arbitrum</a> this week. Co-founder Zaki Manian lamented the standards problem in DeFi, and said that 4626 could speed up his team’s work.



“We’re actually talking to lots of other people in [Ethereum] DeFi about trying to work better [with 4626],” Manian told Blockworks. “If DeFi could collectively all adopt 4626, Sommelier could be everywhere and plug into every protocol in like a few days.”



Yield generating strategies are able to become more complex while also being harder for ne&#8217;er-do-wells to attack. Provisioning audits and ensuring safety has been a major obstacle&nbsp; because each individual protocol implementation has brought its own unique, often complex risks. 4626 — standardizing the tokenized vault — is expected to make the auditors’ job much easier.



But it’s not just about improving speed to market and helping projects become less <a href="https://blockworks.co/tag/hack">hack-prone</a>, the standard also enables new DeFi primitives such as tools for customizable yield exposures, like those developed by Sense Finance, Richardson said.



“Composability is one of the key value props of decentralization in the first place — the whole money Lego pitch for DeFi is one of it’s most critical for adoption,” according to Richardson, who thinks the types of applications that will be built using the standard, is set to rise dramatically.



For instance, <a href="https://blockworks.co/news/gearbox-is-releasing-v3">Gearbox uses 4626</a> to let levered yield strategies be included seamlessly into existing strategy vaults, such as those planned by Yearn Finance in its upcoming V3.



Increasing adoption within DeFi is the primary goal of the alliance, and once met, members will decide on the next steps, such as raising awareness of its benefits to the public.



“Most investors aren’t particularly standard conscious — if they buy an NFT with 1155 versus 721 it’s not changing their perspective a ton,” Richardson said. “However, I think the compound benefit of standardization will lead more people to adopt DeFi because they can start to trust it more.”



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Tokenized Vault Standard on Ethereum Set to ‘Kick Off New DeFi Summer’

DeFi protocol Sommelier announced the launch of a new ETH liquid staking token vault called Real Yield ETH on Wednesday.



Real Yield ETH is the brainchild of strategy provider Seven Seas Capital and Web3 data analytics firm DeFine Logic Labs.



The vault is designed to generate yields on liquid staking tokens including rETH, stETH and cbETH through two primary techniques: leveraged staking on Aave and Compound, and providing liquidity on Uniswap V3. The protocol is expected to make more tokens available on Real Yield ETH in the future.



“The original foundational idea behind real yield ETH was having an index of the best yield on ETH,” Stephen Henkel, the CEO of Define Logic Labs, told Blockworks.



Existing index tokens peg their holders to the validation yield and are dependent on how much commission validators or the protocols are taking, Henkel said.



In the case of Real Yield ETH, which is considered a yield-weighted index, the more yield a particular strategy can receive, the more it will take from that index.



“As a strategy reaches its soft cap of TVL, the incoming TVL can go into other strategies, so it is continuously weighed in such a way that it can take in more and more TVL,” Henkel said.



Although Real Yield ETH is built on top of Sommelier — which is part of the Cosmos IBC, it is an ERC-4626 vault and will live on the Ethereum blockchain.



Sommelier helps these unique strategies come to life as the technology enables “Uniswap V3 tick optimization, really tight leverage loops and taking multiple positions across multiple assets and protocols,” Sun Raghupathi, the co-founder and CEO of Seven Seas, told Blockworks.



<a href="https://www.blockworksresearch.com/">Blockworks Research</a> Analyst David Rodriguez notes that “Sommelier&#8217;s strategy of leveraging an app-chain to optimize the Ethereum DeFi experience that offers non-custodial, institutional-grade mid-frequency strategies that change with on-chain market conditions is a 0 to 1 improvement on yield aggregation protocols like Yearn Finance.”



“Based on (unofficial) backtested models, RealYieldETH should be able to scale to over $60M TVL while providing ~13%+ APY without liquidity incentives,” Rodriguez said. “This is &gt;2x yield than the next competing ETH-based yield opportunity offered by Frax&#8217;s sfrxETH product.”



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Sommelier Launches New ETH Liquid Staking Token Vault

DeFi portfolio management software Sommelier — bucking a trend of institutional yield-farming adaptation — is betting on a couple of new automated trading strategies catering to mom-and-pop retail traders.



The twin products are designed for ether (ETH) and bitcoin (BTC) holders. They’re accessible via the purchase of two so-called strategy tokens, Sommelier’s ETHBTCTrend and ETHBTCMom.&nbsp;



The ETHBTCTrend portfolio follows price and volume trends of bitcoin and ether and adjusts holdings accordingly. The momentum portfolio, ETHBTCMom, reacts to price appreciation of either asset.



By definition, strategy tokens expose investors to trading plays without the backend prerequisite heavy lifting. Investors only need to purchase tokens, then sell shares to exit — so there are no lockup periods or liquidity constraints at play.&nbsp;



<h2 class="wp-block-heading">A non-custodial token </h2>



The trading strategies for the two newly launched tokens will be provided by ClearGate, a financial firm that has previously worked on quantitative trading in TradFi.



Users are currently only able to acquire ETHBTCTrend and ETHBTCMom on Uniswap V3 on Ethereum and Polygon. But Sommelier co-founder Zaki Manian has plans to make the tokens available on additional decentralized exchanges (DEXs) soon.



Despite some minor similarities, purchased strategy tokens — unlike options, swaps and mutual funds — fall under the purview of smart contracts, ensuring the provider cannot take custody of the cryptocurrency. 



Sommelier is set to act as a liaison between the strategy providers, running machine-learning algorithms off-chain on Ethereum. The algorithms power the smart contracts that govern custody.&nbsp;



Validators on Sommelier are tasked with taking trading instructions from providers and implementing on Ethereum accordingly — meaning ClearGate won’t actually control user assets — making the strategies non-custodial.&nbsp;



<h2 class="wp-block-heading">Strategy tokens are designed for wider investor adoption</h2>



Aave on Ethereum has roughly <a href="https://dune.com/queries/595247/1111728" target="_blank" rel="noreferrer noopener">500 daily active users</a> — a fraction of major DEX players, including Uniswap V3, which facilitates transactions for some <a href="https://dune.com/queries/515812/973511" target="_blank" rel="noreferrer noopener">10,000 active users</a> each day. 



According to Manian, it is likely that people continue to engage with DEXs because they don’t understand the complicated processes of placing money in a lending protocol or other DeFi structures.



“But they do have an idea of holding a token,” he said.



Added Manian: “So, the core of what we’re trying to do is to create a token that is a better long term way of holding bitcoin and ether than buying a spot and holding it on an exchange,” Manian said. “ We think that the brain power that we’re bringing to the market through strategies [is] enhancing that.”



Over the long term, Manian is vying for Sommelier to become a “supermarket” for strategy tokens.



“We’re trying to get to a world where if you want exposure to an asset, you won’t have to sit there and watch your computer, adjust limit orders and think about prices and all that stuff,” he said. “You can just buy a strategy token,” he said.



But the process of launching a strategy token hasn’t been simple, Manian said. In part, that’s due to the typical retail investor’s understanding of complex — often esoteric — DeFi concepts are lacking.&nbsp;



“Tokens and staking are probably the two concepts that we have got to significant mass consumption, every other concept in crypto, I think, is still somewhat niche,” Manian said.



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