New Lending Protocol Boosts Optimism TVL

Deposits in Sonne Finance Have Quintupled Since Mid-February

By: Aleksandar Gilbert Loading...

New Lending Protocol Boosts Optimism TVL

Optimism has grown faster in terms of total value locked (TVL) than any other top-12 blockchain over the past month, in part because of rising interest in a five-month-old DeFi lending protocol.

User deposits in Sonne Finance, a modified version of Ethereum lending protocol Compound, have almost quintupled since mid-February. On Thursday, user deposits stood at just above $150M, compared to $36M on Feb. 14, according to data from Defi Llama.


Sonne TVL. Source: DefiLlama

It is now the second-largest protocol on Optimism. But it owes much of its success to the largest: Velodrome, a decentralized exchange with which it is deeply intertwined.


Top 5 Protocols On Optimism. Source: DefiLlama

Sonne’s success is emblematic of decentralized finance: it and Velodrome are modified copies of other protocols, and their integration was made possible by “composability,” the notion that open-source projects can and should be stacked on top of one another to create full-suite financial services.

Velodrome was inspired by Solidly, a now-defunct decentralized exchange built by controversial DeFi developer Andre Cronje.

Velodrome Surprises Investors with Surge on Optimism Blockchain

Velodrome Surprises Investors with Surge on Optimism Blockchain

Overlooked DEX Challenges Uniswap by Taking Four of Top 10 Places on Layer 2

The Defiant The Defiant

Solidly’s failure last year “kind of scared people away from the model for a while,” TokenBrice, the pseudonymous head of marketing at Liquity, told The Defiant. “Except those Velodrome guys, who saw the flaw for what it was, an execution flaw, and understood that the model was really interesting.”

Velodrome incentivizes trading fees, rather than simply providing liquidity. It does this by first rewarding liquidity providers with VELO tokens.

People who lock those VELO tokens can receive two things: yield from trading fees and voting rights to direct incentives, denominated in VELO, toward certain pools. Other protocols can then ‘bribe’ VELO voters with additional incentives to vote for their liquidity pools. The system is meant to drive liquidity to the most valuable trading pairs.

Sonne has taken advantage of that to drive liquidity to its own token on Velodrome, directing rewards to those who provide liquidity on the SONNE/USDC pool.


‘Bribing’ VELO holders. Source: Sonne

“Overall, it’s helping them to both secure a solid baseline of liquidity that kind of grows with the project, and at the same time harness that liquidity to increase the yield that goes to the token stakers,” TokenBrice said. “It’s a nice way to harness the Velodrome flywheel.”

But Sonne doesn’t owe all its recent success to Velodrome.

OP Lending

Lending giant Aave has deployed a version of its protocol on seven blockchains, including Optimism. Crucially, the lending market it offers there for OP, Optimism’s native token, is isolated — depositors can’t borrow OP freely against multiple types of collateral, according to Kel Eleje, a Messari research analyst who recently authored a report on protocols built on Optimism.

“And that has really hampered adoption of the OP token on Aave,” Eleje told The Defiant. “Historically speaking, alongside stablecoins, the main protocol token is usually the largest market that we see [in lending protocols].”

Sonne also provides token incentives on all its own lending pools.

“[That] makes Sonne a more attractive place to lend than Aave, where Aave’s not offering the same, or any incentives, really,” Eleje said. “That marginal yield, even if it only boosts your yield by 2, 3, 4%, if you look at a lot of these depositors who tend to be larger accounts, it’s a lot likelier they’re going to be swayed to go to one platform versus another.”

As of Thursday, Sonne had $9M in OP available to borrow, while Aave had just $300,000.