For much the first three quarters of the year, the amount of capital in the DeFi space was climbing, seemingly without any end in sight.
However, it seems that change is in the air.
Indeed, after Ethereum network transaction fees skyrocketed last week, the DeFi space as a whole has been on a bit of a rollercoaster. Combined with this weekend’s SushiSwap debacle, token prices are all over the place.
For example, yesterday, a number of analysts were saying that the DeFi “bubble” had officially popped. According to data from cryptocurrency market analytics firm Messari, the prices of 32 out of 37 DeFi tokens were down over the course of seven days.
And the losses were nothing to sniff at: CoinTelegraph reported yesterday that Curve had lost 65 percent of its value; Meta followed closely behind with a 58 percent loss. Similarly, Ren, AirSwap, bZx Network, and Wrapped Nexus Mutual had all lost roughly 50 percent of their value.
Rough week in DeFi land with 6 assets dipping more than 50% + over the last 7 days
Where are we going next? pic.twitter.com/3vJiqb4xhr
— Messari (@MessariCrypto) September 8, 2020
However, as of today, nearly all of those markets have made some kind of recovery. At press time, data from Messari showed that 32 the 37 tokens were back in the green, including the tokens that had lost out the worse earlier in the week.
The rapid upward and downward movements of token prices are enough to give one whiplash. What’s driving the movements in the DeFi market–and are we headed toward further gains, or a period of cooling off?
“The economic fallout from the coronavirus has contributed to the growing interest in DeFi.”
Corey Caplan, partner of the DeFi Money Market Foundation, told Finance Magnates that the primary driver behind interest in the DeFi space over the past several months has been the continuing economic turmoil brought about by the COVID-19 pandemic.
“The economic fallout from the coronavirus has contributed to the growing interest in DeFi, the core of which is the decentralization of finance to empower everyday people with more control over their own value,” he said.
Indeed, the DeFi ecosystem has presented a number of new earning opportunities to a growing audience with a healthy appetite for cash.
In a recent article for Finance Magnates, OKEx chief executive Jay Hao wrote that one such earning opportunity–namely, yield farming–is one of the factors that has been driving DeFi token prices so high.
Essentially, yield farming the practice of earning fixed or variable interest by “locking” cryptocurrency into a DeFi protocol. For example, while investing in ETH alone is not yield farming, lending out ETH tokens on Aave or another protocol for a return in addition to any ETH price appreciation would be considered yield farming.
Seems like a win-win, right? Token holders can earn higher gains while other users can gain access to loans and other financial services through decentralized platforms.
The downside of DeFi fever
However, the explosive popularity of yield farming and other ways of earning passive income through DeFi tokens and platforms has a dark side.
Specifically, Jay Hao explained that the feverish interest in DeFi farming may place too much strain on the DeFi ecosystem too soon.
Indeed, Hao said that yield farming “is starting to place too much pressure on the projects in the system.”
“DeFi mania is forcing decentralized finance to run before it can walk and, if the pressure gets too great, could place a strain on its future development,” he explained.
There have already been a number of examples of DeFi projects running into serious trouble because of systemic issues.
Perhaps most famously is the Ethereum network itself: as more and more DeFi projects and decentralized applications have been built on top of the Ethereum network, the network has become congested with high transaction fees and low transaction speeds.
This has led a number of analysts to question Ethereum’s long-term viability as the backbone of the DeFi ecosystem, even with the update to ETH 2.0 on the horizon. Additionally, second-layer solutions that could help with Ethereum congestion exist, but have not been adopted in a meaningful way.
A number of hacks and exploits have shown that DeFi infrastructure may have a ways to go before it can safely hold users’ funds
Beyond the Ethereum network, there have been a number of incidents on DeFi protocols that have seriously called the readiness of DeFi ecosystem into question when it comes to taking care of users’ funds.
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One of the most famous examples of this took place in April when Lendf.me, a subsect of the dForce DeFi platform, was exploited to the tune of $25 million.
The hacker eventually returned the funds, but the incident served as an important learning experience for the DeFi space as a whole. At the time of the hack, Anton Mozgovoy, chief technical officer of fintech firm Humaniq, told Finance Magnates that at the end of the day, “DeFi platforms are only as safe as the code they have.”
Indeed, on DeFi platforms, “there is no quality assurance process, [like there is in many] non-blockchain software applications,” Anton Mozgovoy explained. Therefore, “your code has to be 100% correct before you deploy it. Otherwise, it becomes vulnerable.”
Since there is no standaridized ‘quality assurance’ test for DeFi platforms, however, these platforms–and their users–are tested in a “trial-by-fire” manner.
On the other hand, however, Bison Trails chief executive Joe Lallouz told Finance Magnates in a recent interview that it’s better for these kinds of incidents to happen sooner rather than later: “the sooner and faster that these things happen, the sooner and faster that these kinks can be ironed out, and the sooner that we can transition these services and products to be a little bit more ‘mainstream-ready.’”
“The pace of innovation in DeFi is fascinating, and the pace at which it’s being ‘battled-tested’ is also fascinating,” he said.
The yield-farming craze
Beyond technical hurdles that may be holding the DeFi ecosystem back, however, speculators in DeFi token markets may be creating another set of issues in the decentralized finance space
Specifically, Chris Williamson, principal at crypto advisory firm MB Technology Limited, told Finance Magnates that in the short-term, promises of high returns may lead token holders to “lock” their coins into platforms that have no long-term viability.
“Unfortunately, these new users and the new money are driving projects to bring products to market [for the sole purpose of] chasing the money,” he said. “Many of these projects include token rewards that lack utility.”
As such, the DeFi space is beginning to look a bit similar to the ICO craze at the end of 2017: “we’re seeing a flood of new tokens with little to no utility,” Williamson explained to Finance Magnates. “As such, these tokens aren’t holding their value when sellers outnumber buyers.”
Speculators are driving token prices beyond their fundamental value
And even when tokens do have utility in the systems they’re designed to be used in, the DeFi token market seems to be so flooded with speculators that coin prices are still overbought.
Deniz Omer, head of ecosystem growth at Kyber Network, pointed this out in an interview with Finance Magnates earlier this year.
“The ratio of speculative value is increasing compared to the fundamental value” in the DeFi ecosystem, he said.
“It’s not that these products are not amazing – they are super amazing … but when I see a several-thousand-dollar valuation for some kind of governance token, I’m not sure the capture mechanism allows for so much value to go up.”
Therefore, market corrections–including the one that happened over the course of the last week–are going to be a fairly regular occurrence as long the ratio of speculative value to fundamental value is tipped toward the former.
And eventually (much like the ICO market), the ratio should tip further towards fundamental value, “especially as more people join in,” Deniz said.
For example, “in 2017, if you look at the actual value that existed, I would say that 98 percent of that was speculative value, and only two percent was fundamental value.
“Over 2018 and 2019, as the market deflated,” the ratio began to reverse course: “fundamental value went higher and higher, and speculative value kind of dropped.”
“In any nascent sphere, a single entity’s failure or success can have an outsized effect on the entire space.”
There have also been several incidents that have left a dark mark on the DeFi industry that have not involved technical problems or overbought token prices.
Rather, these incidents have involved elements of bad faith: exit scams and other kinds of fraud are not as common as they were during the ICO craze of late 2017, there have been several mishaps.
This week, a liquidity mining DeFi project on EOS called Emerald Mine (EMD) was accused of an exit scam. Additionally, the events that surrounded the SushiSwap scam over the weekend had large swathes of the community accusing the platform’s pseudonymous founder of pulling a similar move (which he denied).
While incidents of fraud were much more commonplace in the ICO sphere, both incidents have been the subject of much conversation. Corey Caplan pointed out that though much less frequent, incidents of fraud in the DeFi space could be having a large impact.
“In any nascent sphere, a single entity’s failure or success can have an outsized effect on the entire space,” he said. “This is what happened with the SushiSwap snafu, but I don’t believe this incident should be viewed as an encapsulation of the entire DeFi ecosystem.”
Indeed–despite the many growing pains of DeFi, things are moving ahead. “Developments such as yield farming and other neat incentivization schemes continue to spark interest among traders and those newer to crypto who are interested in how to gain more value for themselves. On-chain activity continues to thrive and protocol developments are continuing forward.”
Therefore, while the market may continue to correct in the short term, DeFi seems to be poised for a major expansion over the long term.
What are your thoughts on the growth of the DeFi ecosystem? Let us know in the comments below.
NextGen Blockchain Platforms Self-Organize to Win Government Contracts
Over the past year, blockchain development communities have turned their attention towards winning government contracts.
Washington, DC. There is a huge opportunity presented by increased government spending on blockchain projects. According to Bloomberg Government BGOV200 Report, federal government spending reached $597 Billion in 2019. However, since new businesses face barriers gaining direct access to government contracts, many have joined the Government Blockchain Association (GBA) to introduce their cutting-edge blockchain platforms to the public sector.
Traditionally government program managers choose to work with the same few legacy companies. For example, there are currently over 4.1 million US Federal government contractors but of the $597 billion in prime contracts awarded in FY19, the top 10 government contractors received $173.4 billion according to Bloomberg Government. However, the COVID-19 Global Pandemic was a catalyst that necessitated governments from around the world look at bold and innovative new ways to solve problems from a more diverse community.
In March of 2020 the US Department of Health and Human Services hosted a virtual Pandemic Response Hackathon. This hackathon idea completely changed the former process of government acquisitions. The slow pattern of the past was rewritten to adopt to the chaos, uncertainty, and urgency of COVID. Government contracts went from a centralized channel to open and decentralized solutions coming in from completely new sources. A new way of doing business was introduced to the world stage, and in November 2020 the Indian Ministry of Electronics and Information Technology (MeitY), National Informatics Centre (NIC) held their own up a GovTech Hackathon. Throughout 2020, countless examples of crowdsourcing solutions contested the traditional procurement processes.
Along with new paradigms in acquisitions, 2020 brought explosive growth of decentralized development communities and platforms. Decentralized communities operate on independently run servers, rather than on a centralized server owned by a business. Initially, most blockchain solutions were private-permissioned blockchains dominated by a single vendor. One of the most popular government blockchain solutions is Hyperledger Fabric. Though it is technically an open-source project, almost 80% of software changes to Hyperledger Fabric came from IBM, demonstrating an ongoing dependence on IBM to maintain the code.
Lately, next gen blockchain solution providers have been self-organizing into working groups and communities to compete in the contracts space. The largest and most engaged of these decentralized communities is the Government Blockchain Association, with members in over 500 Government Offices, thousands of public and private sector members in 120 Chapters, and more than 50 Working Groups, and 25 Communities of Interests. They also host regular online and in-person events to introduce blockchain solution providers to government officials, promoting this new diverse community.
Some of these next gen blockchain leaders include:
- DragonChain – DragonChain is an enterprise and start-up-ready platform to build flexible and scalable blockchain applications. It has business-ready applications and developer-friendly integrations that support many applications including learning management systems, decentralized identity, and anti-fraud and compliance solutions.
- NEM – A community that has developed two blockchains. They are NEM NIS1 and Symbol. NEM NIS1 is the original blockchain offering from NEM, created by the community, and optimized to be a developer’s sandbox. With zero downtime or major outages since 2015, NIS1 is the blockchain you can trust for all your project needs. Symbol is the next-generation enterprise-grade blockchain solution from NEM, purpose-built to help businesses cut costs, reduce complexities, and streamline innovation. With major upgrades in flexibility, security, speed and ease of use, the Symbol platform is the best-in-class blockchain enterprise solution.
- Simba Chain – SIMBA Chain is a cloud-based, blockchain-as-a-service (BaaS) platform, enabling users across a variety of skill sets to implement decentralized applications (dapps). These apps allow secure, direct connections between users and providers, eliminating third parties. The easy-to-use platform is tailored for users, developers, government, and enterprises to quickly deploy blockchain dapps for iOS, Android, and the web.
- TON Labs – TON Labs is the core developer of Free TON, comprised of a decentralized team focused on developing the infrastructure and free software for TON OS. TON OS is a full-fledged, vertically integrated technology stack that helps developers work easily with the blockchain and makes it simple and intuitive for users.
Decentralized blockchain projects include the Government Business Blockchain Platform (GBBP). This multi-blockchain platform allows solutions built on any blockchain to connect and become available to governments around the world. Sub-set eco-systems include Emergency Management, Healthcare Delivery, and Citizen Services. Blockchain applications can interconnect on the GBBP, providing identity management, logistics, asset management, payments, and many other blockchain services.
These examples demonstrate how blockchain providers are working together, self-organizing into decentralized entities to build public-facing blockchain solutions. GBA groups regularly host online meetings to discuss their projects. Anyone interested in joining the discussion can find out more on the GBA Events Calendar or Events List. Later this year the GBA will be bringing World-Class Leaders to Washington, DC for Government Blockchain Week on Sept 27 to Oct 1, 2021.
Robinhood Reports 6 Million New Crypto Traders in 2021
In a blog post on Feb. 26 titled “Crypto goes mainstream” the retail trading app revealed that it had seen six million new customers on Robinhood Crypto so far this year.
The number of new monthly customers buying from its crypto platform in 2021 is 15 times the 2020 average.
“By comparison, this number peaked at 401,000 in a single month last year, with a monthly average of about 200,000 customers trading on Robinhood Crypto for the first time during 2020.”
Robinhood, which had to halt trading in late January due to overwhelming demand, offers just seven tradeable crypto assets; Bitcoin, Bitcoin Cash, Bitcoin SV, Dogecoin, Ethereum, Ethereum Classic, and Litecoin.
There are no trading size limits though it added that the average transaction size is around $500. The chart provided indicates that the average trade was around half of that at $200 to $250 for the previous year.
First-time buyer? Long-term #HODLer? 🚀 This year, six million of you used Robinhood Crypto for the first time to buy and sell #crypto. We fully intend to provide the ability to deposit and withdraw cryptocurrencies.💥 Learn more: https://t.co/8VQhKtWB32 pic.twitter.com/rwsVdlNIg3
— Robinhood (@RobinhoodApp) February 25, 2021
Retail Traders Surging
The app offers an intuitive user interface and educational articles that explain cryptocurrencies. It is targeted at newbies that may not have the technical knowledge to operate more advanced trading platforms.
It also offers zero-fee trading, but makes money on spreads between makers and takers.
The report reinforces the premise that retail has arrived after months of steady institutional investment which has pushed many high cap crypto assets including Bitcoin and Ethereum to their highest ever prices.
“The numbers are clear: 2021 has started with a crypto bang.”
In a Feb. 18 note from company CEO and co-founder, Vlad Tenev, it was revealed that the total value of customer assets on Robinhood (for all markets) exceeds the net amount of money they have deposited by over $35 billion. He added;
“While markets fluctuate, this tells me that our business model is working for everyday Americans.”
Crypto Correction Deepens
The Robinhood numbers are bullish for overall sentiment, but the crypto correction is deepening and March is usually a bearish month for markets.
Since its all-time high of $1.78 trillion on Feb. 22, total market capitalization has declined by 18% to $1.46 trillion today according to Coingecko.
Bitcoin has been leading the drop as usual with an 18.7% fall from its $58k peak last weekend to just over $47k at the time of press. Meanwhile, Ethereum has been hit even harder, retreating 27% from its ATH of over $2k to below $1,500.
Another 30% correction could be on the cards, echoing the one that occurred in early January when Bitcoin prices dropped below $30k before recovering to a new high. The bigger picture still paints a bull market.
Kraken Daily Market Report for February 25 2021
- Total spot trading volume at $1.86 billion, near the 30-day average of $2.08 billion.
- Total futures notional at $780.0 million.
- The top five traded coins were, respectively, Bitcoin, Ethereum, Tether, Cardano, and Polkadot.
- Strong returns from Lisk (+16%), Litecoin (+11%), Synthetix (+12%), Kyber Network (+11%), and Kava (+11%).
|February 25, 2021
$1.86B traded across all markets today
Crypto, EUR, USD, JPY, CAD, GBP, CHF, AUD
#####################. Trading Volume by Asset. ##########################################
Trading Volume by Asset
The figures below break down the trading volume of the largest, mid-size, and smallest assets. Cryptos are in purple, fiats are in blue. For each asset, the chart contains the daily trading volume in USD, and the percentage of the total trading volume. The percentages for fiats and cryptos are treated separately, so that they both add up to 100%.
Figure 1: Largest trading assets: trading volume (measured in USD) and its percentage of the total trading volume (February 25 2021)
Figure 2: Mid-size trading assets: (measured in USD) (February 25 2021)
Figure 3: Smallest trading assets: (measured in USD) (February 25 2021)
#####################. Spread %. ##########################################
Spread percentage is the width of the bid/ask spread divided by the bid/ask midpoint. The values are generated by taking the median spread percentage over each minute, then the average of the medians over the day.
Figure 4: Average spread % by pair (February 25 2021)
#########. Returns and Volume ############################################
Returns and Volume
Figure 5: Returns of the four highest volume pairs (February 25 2021)
Figure 6: Volume of the major currencies and an average line that fits the data to a sinusoidal curve to show the daily volume highs and lows (February 25 2021)
###########. Daily Returns. #################################################
Daily Returns %
Figure 7: Returns over USD and XBT. Relative volume and return size is indicated by the size of the font. (February 25 2021)
###########. Disclaimer #################################################
The values generated in this report are from public market data distributed from Kraken WebSockets api. The total volumes and returns are calculated over the reporting day using UTC time.
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