Decentralized Finance (DeFi) is without doubt the biggest news to come out of the crypto space this year. Bitcoin is grabbing the attention of Wall Street at last over its surprising price resilience and recovery during the pandemic, posting YTD returns of 65% and running circles around the S&P 500 at just 8% YDT and even gold at 31% YTD… But the real gains are happening in DeFi.
The rise of an alternative financial system that can lend services to the world’s unbanked, bring real-world assets onto the blockchain, and allow for the transfer of billions of dollars in value in seconds at a next-to-nothing fee while providing high returns and passive income is simply too compelling to ignore.
Yet, as with almost all areas in this nascent space, DeFi’s growth is a marathon and not a sprint–at least, it should be. We’re seeing one exciting innovation after another come out of this industry and billions of dollars of value being locked into its protocols. But while there are many promising projects to invest in if you truly believe in the promise of DeFi, short-term parabolic growth is inevitably going to attract the speculators looking for quick gains.
When DeFi tokens are soaring by more than 1000% in less than a week, it’s hard not to want a slice of the action. Yet, unlike the ICO boom in 2017, it isn’t only speculators driving this momentum. Yield farmers are further fueling the fire feverishly searching for the best APYs in the space to make superlative gains while they can.
While all this action is certainly contributing to the growth of the DeFi economy (yield farming has led to more than $9.1 billion in locked value today), it’s 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.
What Is Yield Farming and Why Is it Potentially Harmful?
With so many innovations happening in a short space of time, it can be hard to keep up with the latest practices and terminology coming out of DeFi. But let’s take a look at the main one that’s driving its wild growth right now: yield farming. In a nutshell, yield farming is where projects create tokens to reward liquidity providers on their platforms. It doesn’t matter whether it’s a lending or borrowing app, or a DEX; the premise is the same: to
receive these rewards (yields), holders must lock their tokens into the project.
These tokens must remain locked for the liquidity providers to receive rewards and cannot be sold or traded. It’s not surprising then, that with the staggering growth many DeFi projects are seeing (yEarn’s YFI token grew by an astonishing 15,000% in less than one week) that the USD value of all the tokens locked into DeFi projects is skyrocketing higher every day.
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Locking tokens for yields also has the double effect of restricting supply and pushing its price higher, leading to beaming smiles on the face of many a speculator. And it’s not only DeFi tokens that are being locked into protocols but plenty of Ether as well. While there is abundant anticipation for the upcoming switch to ETH 2.0 and Proof of Stake, it’s also no coincidence that ETH price is flying as more of it is locked into DeFi.
As DeFi has galloped ahead, ETH has posted a YTD of well above 260% even reaching $471 at its peak in recent days. Why is this a problem? Because just like pot stocks, the ICO craze, or Bitcoin’s FOMO-fueled run in 2017… we’ve all seen what happens when price outstrips the real underlying value of the asset.
DeFi Still Has Many Challenges to Overcome
At my company, we haven’t been watching the growth of the DeFi space from the sidelines. We’ve been actively contributing not only by offering the most comprehensive range of high-quality DeFi tokens for our users but also by building alongside the major protocols.
We’re truly invested in the DeFi economy and believe in its promise and longevity over time. But, we must remind all investors that this technology still has a long way to go. Anticipation over ETH 2.0 is building yet it isn’t entirely certain when (or indeed if) the PoS switch will come. We’re seeing more DeFi protocols independent from ETH springing up, yet the vast majority are still overwhelmingly dependent on the Ethereum blockchain, including major players like Maker and Compound.
The fact remains that even with innovations and pushes to improve the security of the sector, such as open price feeds and decentralized oracles, DeFi’s fundamentals are not improving as fast as the price of its tokens. This could be a problem as investors hellbent on increasing their risk are leveraging to obtain maximum yields. This snowball of frenzied hype and expectation could cause DeFi to undergo enormous strain and even lead to a shakeout that sees a lot of people getting burned.
If there is a problem with the tech, such as network congestion or a breakdown in oracles, a price correction may come and the hungry over-leveraged yield farmers will be unable to liquidate their assets. This could cause a landslide that shakes the confidence in this area and undermines DeFi’s long-term trajectory.
While it will be the weak hands shaken out of the market, it will still be a shame if it happens. We should support the growth of DeFi by actively building and working to make it more robust–rather than seeking quick gains and creating unreasonable expectations.
Jay Hao is the CEO of OKEx
China aims to let foreigners use digital yuan at Winter Olympics in 2022
China’s central bank is looking to enable foreign athletes and visitors to use the country’s digital currency during the Beijing Winter Olympics in 2022, according to a top central bank official.
Li Bo, deputy governor of the People’s Bank of China, said that the upcoming Winter Olympics could potentially become the first test of China’s central bank digital currency, or CBDC, by foreign users.
“For the upcoming Beijing Winter Olympics, we were trying to make e-CNY available not only to domestic users, but also to international athletes and like visitors,” Li said Sunday at a CNBC panel at the Boao Forum for Asia. The bank previously announced its plans on testing the digital yuan at the event in August 2020.
The official said that the PBoC doesn’t intend to replace the United States dollar’s dominance as the world’s reserve currency. Li reportedly noted that the central bank is focused on the domestic use of the digital yuan.
“For the internationalization of renminbi, we have said many times that it’s a natural process and our goal is not to replace the U.S. dollar or any other international currency. I think our goal is to allow the market to choose and to facilitate international trade and investment,” he stated.
Despite the PBoC’s focus on the domestic digital yuan, China’s central bank is still exploring cross-border CBDC use. “At the same time, working with our international partners. Hopefully, in the long term, we have a cross border solution as well,” Li said. At the forum, Li also said that China’s central bank now views the major cryptocurrency Bitcoin (BTC) as an “investment alternative.”
After launching its first domestic digital yuan tests in 2020, China started cross-border CBDC pilots in collaboration with central banks in Hong Kong, Thailand and the United Arab Emirates in February 2021. On April 1, PBoC director of research bureau Wang Xin announced that China’s central bank completed the first cross-border pilots of the digital yuan with the Hong Kong Monetary Authority.
Chinese authorities have stressed multiple times that the government is not seeking to replace existing fiat currencies including the U.S. dollar with the digital yuan. “We are not like Libra and we don’t have an ambition to replace existing currencies,” Zhou Xiaochuan, the president of the Chinese Finance Association and former PBoC governor, said in late 2020.
As previously reported by Cointelegraph, the U.S. has taken a careful approach toward CBDCs due to the U.S. dollar’s status of the world’s reserve currency and other CBDC-related challenges like privacy. The European Central Bank is also still deciding whether Europe needs a digital euro, with ECB President Christine Lagarde expecting the digital currency to be adopted in four years, at the earliest.
UK government establishes central bank digital currency task force
Her Majesty’s Treasury and the Bank of England have begun preliminary central bank digital currency studies that could result in the creation of a national digital currency.
In a document published by HM Treasury, the exchequer announced the creation of a CBDC taskforce in collaboration with the U.K.’s central bank.
Jon Cunliffe, deputy governor of the Bank of England and Katharine Braddick, director general of financial services at HM Treasury will co-chair the task force.
According to the terms of reference document, the task force will synergize the efforts of all relevant statutory bodies in the U.K. regarding CBDC development.
As part of its duties, the task force will explore preliminary issues associated with the design, implementation, and operation of a CBDC in the U.K. The task force will also interface with stakeholders across academia, fintech and other relevant industries to identify the technological hurdles involved in creating a sovereign digital currency.
The joint HM Treasury and BoE task force will also monitor CBDC-related developments on the international scene especially as other nations are actively exploring their own central bank digital currency projects.
According to a BoE press release issued on Monday, the central bank will also run its own internal CBDC unit headed by Jon Cunliffe.
The establishment of the task force is yet another indication of the U.K. government’s focus on digital currencies and fintech in the aftermath of Brexit. In November 2020, Rishi Sunak, chancellor of the Exchequer said that Brexit offered an opportunity for the U.K. to revamp its financial services sector.
Since Brexit, Sunak has overseen a significant policy shift towards harnessing novel fintech innovations like CBDC and stablecoins. As previously reported by Cointelegraph, U.K. financial services minister John Glen has identified stablecoin regulations as the major focus of the government in the area of cryptocurrency regulations.
According to a report by Reuters, the U.K.’s financial market focus is also extending towards distributed ledger technology firms. Speaking during a financial industry conference on Monday, Sunak announced that the government plans to establish a fintech sandbox for blockchain startups.
China ‘endorses’ BTC investment: 5 things to watch in Bitcoin this week
Bitcoin (BTC) is beginning a new week grinding back to $60,000 as the shock of a weekend price crash settles.
After dropping to as low as $52,000 in a snap sell-off event, Bitcoin has spent the past two days slowly recovering its losses. What’s next?
Cointelegraph presents five factors to consider as a new trading week gets underway and cryptocurrency holders across the board nurse their wounds.
Stocks primed for “up only” short term
The macro picture is fairly stable in Asia and Europe, with United States markets yet to open.
A mixed picture greeted investors at the open, but volatility has been broadly absent, with only oil showing signs of more pronounced weakness.
As such, little impact on Bitcoin is to be expected from equities moves, these forecast to continue building on record highs in the coming weeks.
Russel Chesler, head of investments and capital markets at the Australian branch of crypto-friendly investment manager VanEck, captured the mood in a note quoted by Bloomberg.
“Our current view is that with short-term interest rates set to remain low for the medium term and our expectation that earnings will continue to increase, it is unlikely that the increase in long-term interest rates will trigger an equity market fall,” he wrote.
Coronavirus concerns still linger despite stocks’ relentless surge higher, with more reported official cases last week than ever before worldwide.
Economic responses continue to vary, with a patchwork of openings and closings characterizing countries’ latest attempts to control the outbreak.
Bitcoin recovers from $52,000 crash
In Bitcoin circles, the main talking point naturally remains the weekend’s events, which saw a sudden cascade of selling send BTC/USD down by $7,000 in a matter of minutes.
Bouncing at just above $52,000, the crash echoed several similar events this year, and Bitcoin managed to regain around 50% of its lost ground within hours.
Responses, however, are split between those who consider the volatility “business as usual” and more conservative voices calling time on the latest bull run.
As Cointelegraph reported, suspicions are focusing on a Chinese power blackout hitting hash rate, as well as rumored legal action by U.S. regulators against unnamed financial institutions related to money laundering.
In his own breakdown of what happened, popular statistician Willy Woo highlighted both China and skittish moves by futures investors as contributing to the losses.
“We just saw the single largest 1-day drop in mining hash rate since Nov 2017. The hash rate on the network essentially halved, causing mayhem in BTC price as it crashed,” he told Twitter followers.
In a sign that the future could see fresh sustained upside, Woo reiterated the “reset” in an on-chain metric, the spent transaction output ratio (SOPR), showing that long-term investors will likely soon stop selling altogether.
“The on-chain SOPR metric near a full reset. A classic buy the dip signal,” he added.
“In simple terms, profit taking by longer term investors is completing, very little sell power left unless investors want to sell at a loss from their entry price. Unlikely in a bull market.”
Fundamentals point higher
It’s not just SOPR — a whole range of Bitcoin network indicators and fundamentals are buoying bulls’ cause, even as BTC/USD remains below even February’s high of $58,300.
For Woo and others, particularly important are the transfer of funds to investors who have traditionally hodled, not sold — another classic trait of Bitcoin’s rise in recent months.
“Serious strong-handed holders are buying this dip. In the last 24 hours, over 200,000 Bitcoin became illiquid, a 3-year record,” fellow analyst William Clemente added Sunday.
“This illiquid supply increase is not only just dip buyers with no history of selling, but partially accumulation from 5-6 months ago of which those wallets have just crossed the ‘illiquid’ threshold for this metric.”
Lastly, around 13.5% of the total available Bitcoin supply has been active above $53,000, something which Woo says is confirming its status as a trillion-dollar asset. At around $53,800, Bitcoin’s market cap becomes a solid $1 trillion.
“This dip happened while unprecedented numbers of new users are arriving onto the network per day. There’s been a retail influx in the last 2-3 weeks,” Woo additionally noted, with total wallet numbers nearing 10 million.
Difficulty takes care of miner woes
A closer look at hash rate, which at one point dipped by almost half, shows that a recovery in line with price is underway.
According to rough estimates from on-chain monitoring resource Blockchain, Bitcoin network hash rate is already back above 150 exahashes per second (EH/s), having broken through the 200 EH/s barrier for the first time in history last week.
Miners leaving the network due to power problems leads to Bitcoin’s network difficulty decreasing to incentivize more to come online.
Further confirmation that the weekend’s issue was firmly temporary comes from difficulty forecasts — in two weeks’ time, when it next adjusts, difficulty will only drop by around 4%, a modest move which could yet be cancelled out altogether as miners return.
This balance between hash rate and difficulty is arguably the most important aspect of Bitcoin, one which allows it to govern itself and preserve security and functionality regardless of sudden events impacting network participants.
Chinese central bank praises Bitcoin and stablecoins
In another unanticipated event which is arguably yet to be fully appreciated by the market, China has given an unprecedented stamp of approval to cryptocurrency as an “investment alternative.”
Speaking at a conference organized by CNBC, Li Bo, deputy governor of China’s central bank, the People’s Bank of China (PBoC), broke ranks to validate both Bitcoin and stablecoins.
“We regard Bitcoin and stablecoin as crypto assets… These are investment alternatives,” he said.
The comments are surprising as despite being a center for Bitcoin mining activity, China has had a blanket ban in place on trading and transacting in cryptocurrencies since September 2017.
“Every country that bans Bitcoin eventually reverses that ban. You simply cannot be competitive in the 21st century economy without it,” Charles Edwards, founder of investment firm Capriole, responded.
“China is playing 4D chess. The last 3 days have made very clear they still dominate global mining. Slowly, slowly then all at once.”
The market barely reacted to this high-level affirmation of Bitcoin’s long-term potential. At the time of writing, Bitcoin is still hovering at $57,000, as yet failing to see an attack of familiar resistance levels.
Crypto has arrived.
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