How DeFi Goes Mainstream In 2020: Focus On Usability (#GotBitcoin?)
2019 was an important year in the slow but steady march towards a future of decentralized finance (DeFi). How DeFi Goes Mainstream In 2020: Focus On Usability (#GotBitcoin?)
What Is DeFi?
DeFi is an abbreviation of the phrase decentralized finance which generally refers to the digital assets and financial smart contracts, protocols, and decentralized applications (DApps) built on Ethereum. In simpler terms, it’s financial software built on the blockchain that can be pieced together like Money Legos. Read more about DeFi.
What’s The Purpose of DeFi Pulse?
DeFi Pulse is a site where you can find the latest analytics and rankings of DeFi protocols. Our rankings track the total value locked into the smart contracts of popular DeFi applications and protocols. Additionally, we curate The DeFi List, a collection of the best resources in DeFi.
How Do We Calculate Total Value Locked(TVL)?
DeFi Pulse monitors each protocol’s underlying smart contracts on the Ethereum blockchain. Every hour, we refresh our charts by pulling the total balance of Ether (ETH) and ERC-20 tokens held by these smart contracts. TVL(USD) is calculated by taking these balances and multiplying them by their price in USD.
How Do I Get Involved In DeFi?
Decentralized finance is open for anyone to take part in. You can start by exploring the resources found on The DeFi List. And if you’re looking to dive head first into the world of DeFi, we’ve written a beginner’s guide called Zero to DeFi. It will teach you the basics, guiding you through how to start earning passive income via DeFi lending services.
Bitcoin once again hit five figures, cementing it position as digital gold (in the words of the Federal Reserve Chairman). The ethereum ecosystem continues to expand. Exciting new DeFi ventures are grabbing headlines every week, from decentralized VPN providers to blockchain infrastructure projects to payment providers.
Equally important, 2019 saw an acceleration of a global attitudinal trend: dissatisfaction with centralized powers. Popular mistrust of banks and financial institutions is deepening. Disinformation on social media platforms is on the rise. Corruption, inequality, and authoritarianism are driving people to the streets, from Hong Kong to Santiago, demanding structural change or new governments. The post-Cold War order has devolved into a tinderbox – which is why all roads lead to a decentralized future where people seize control of their assets, their data, and their financial future.
To be sure, the DeFi movement still has so very far to go. Today’s total crypto market cap of $195B (at the time of this writing) is over $150B shy of the assets managed by the 10th largest U.S. bank. The vast majority of consumers still do not hold cryptocurrencies. They store their money with banks and other centralized financial institutions, and invest only in stocks and bonds.
With 2020 upon us, the crypto community finds itself in an awkward position: we have been so busy building base layer infrastructure and shoring up support among enthusiasts that we practically forgot about the average consumer.
We need to bring DeFi into the fold of mainstream financial services. But, to do so, DeFi projects must build on-ramps – including better user interfaces, accessible products and services, and stablecoins – that make it easier for people who don’t know much about cryptocurrency to buy digital assets easily and participate in decentralized financial services.
A Road Map
First, DeFi needs interfaces that are familiar, intuitive, and enjoyable. DeFi projects can and should maintain multi-sig contracts, protection of data privacy, access to distributed blockchains, and all the other decentralized features. But they should lay them underneath the hood of applications that are consumer-friendly, like mainstream platforms or online banking services.
Second, the DeFi community should create products and services for a greater share of the population. Trading and arbitrage platforms are useful for day-traders and hedge funds, but the people who need DeFi the most are not looking to actively trade crypto assets. DeFi projects must rediscover the original purpose of bitcoin by focusing on peer-to-peer exchange and removing toll-collectors from financial services.
Projects like Celsius Network (of which I’m CEO), Voyager, Compound, and Monarch, among others, are providing more common financial services like lending, interest income, wealth management, and collateralized loans. Offering these services will allow DeFi projects to expand their reach by providing real value to more people across the world, no matter income, age or location.
Third, DeFi providers should be conscious of the fact that many people still feel uncomfortable investing in digital currencies due to price volatility. As such, stablecoins will be an important bridge from centralized fiat assets to decentralized cryptocurrencies. First-time buyers will be surprised to discover they can (a) earn more interest on stablecoins than on dollars in a savings account, and (b) not have to worry about depreciation in the value of their collateral. Resembling fiat currencies, stablecoins can function as a teaser for BTC, ETH, and other decentralized currencies and DeFi projects.
In sum, DeFi and cryptocurrencies can go mainstream, but they need to be as easy to use as Facebook or Google. Just as one cannot throw first-time swimmers into the deep end of the pool and expect them to swim, we cannot introduce crypto novices to complicated DeFi services and expect them to become Hodlers. Let’s concentrate our efforts in 2020 on making DeFi into a movement where everyone can participate and enjoy the fruits of decentralization. After all, Bitcoin just hit its 11th birthday and we’re only getting older.
Celsius To Begin Offering Compounding Interest On Crypto Deposits
Cryptocurrency lending and borrowing platform Celsius announced that it would be implementing compounding interest on cryptocurrencies deposited in its wallet, starting Feb. 1. The announcement came with a number of other updates in a Twitter AMA (ask me anything) with founder Alex Mashinsky on Jan. 22.
Compounding interest was a feature requested by the Celsius community, and brings the community-driven app in line with venture capital-backed competitors like BlockFi, and traditional financial services. In announcement sent to Cointelegraph the firm stated:
“You asked for it, and we delivered! Starting February 1, interest income on crypto deposits will officially be COMPOUNDING! That’s right – all the coins in your wallet will now be earning interest on interest!”
Other changes announced in the AMA covered revamped loyalty tiers, the ability to lend against EOS tokens, and a partnership with South Korean cryptocurrency exchange, Korbit.
Users can also now earn up to 8.1% APR on their first deposited Bitcoin (BTC).
Fastest Growing Crypto-Lender
As Cointelegraph reported lin August 2019, Celsius Network became the fastest growing crypto-lender with $2.2 billion in coin loan origination. By November, the total loan amount had almost doubled again, reaching $4.25 billion.
Crypto-lending platforms continue to grow in popularity, giving holders the opportunity to earn interest on their deposited assets, while also enabling the use of tokens as collateral against cash or stablecoin loans.
Celsius offers varying interest rates on deposits of a wide range of popular cryptocurrencies, including Bitcoin, Ether (ETH) and Litecoin (LTC), along with coins such as Bitcoin Gold (BTG), Dash (DASH), ZCash (ZEC) and EOS. Higher interest rates of up to 10% are also available on a selection of stablecoins.
Kyber Network Aims To Improve DeFi Liquidity With ‘Katalyst’ Protocol Upgrade
Kyber Network, the ethereum-based protocol focused on aggregating liquidity and facilitating swaps for ERC-20 tokens, is about to launch a major upgrade.
Planned to go live in the second quarter of 2020, Katalyst is said to be a major upgrade to the Kyber protocol to better meet the liquidity needs of the decentralized finance (DeFi) ecosystem.
Currently, the Kyber Network (KNC) design allows for any party to contribute to an aggregated pool of liquidity within each blockchain while providing a single endpoint for takers to execute trades using the best rates available.
Katalyst aims to reduce friction in liquidity contribution, introduce rebates for high-performing reserves (liquidity providers) and allow DApps integrated with Kyber to add a custom spread for flexible rates.
Simon Kim, CEO of Hashed, a blockchain venture capitalist firm based in Seoul and California’s Silicon Valley, said the introduction of Katalyst would be able to grow the network exponentially by providing greater incentives for its contributors.
“The Kyber Network has proven its utility as the most reliable liquidity pool for all the participants in the DeFi ecosystem on ethereum,” Kim said.
On top of liquidity optimization, the Katalyst upgrade will include a new staking mechanism and the launch of the KyberDAO, a community platform that allows KNC token holders to participate in governance for the first time.
Joshua Green, head of trading at Digital Asset Capital Management, a cryptocurrency trading firm based in Sydney, Australia, said as the DeFi space continues to move from its development phase to focus on users and transaction execution, liquidity becomes a more prominent driver of continued growth.
“We are excited by a number of projects and the disintermediating models they have developed,” Green said. “Higher levels of liquidity now need to follow to make them more efficient for the widest user base and make their value proposition as strong as possible against centralised peers.”
Trading on centralized exchanges is currently not compatible with DeFi applications since it is technically infeasible to bridge between decentralized applications and centralized servers without compromising the trust model.
KNC is currently up 27 percent over the last 30 days and is up 78 percent year-to-date making it one best-performing crypto assets for 2019. It is currently changing hands for $0.22, according to data provider Messari.
Kyber supports over 70 different tokens and powers close to 100 integrated projects including popular wallets MEW, Trust, Enjin, and the HTC Exodus smartphone.
Coinbase Custody And Bison Trails To Lobby Staking Adoption
Coinbase Custody and Bison Trails have joined the ranks of the Proof of Stake Alliance (POSA), a Jan. 30 press release announced. Together with the alliance, they will advocate for the adoption of clear regulations on staking proceeds, as well as other development initiatives.
The Proof of Stake Alliance is an advocacy group founded in 2019 and featuring more than 18 members. It engages in regulatory and congressional discussions to promote staking-friendly regulation, as well as organizing events and educational initiatives.
As COO at Polychain Capital and POSA board member Matt Perona explained to Cointelegraph, the organization’s primary goal is to change the taxation regime for staking rewards:
“First, POSA is working to address how staking rewards received by token holders are taxed. POSA is currently trying to differentiate tax treatment from bitcoin mining guidance so that staking rewards are taxed on the disposition of the asset (the sale of the reward) as opposed to the receipt.”
Both mining and staking rewards are currently taxed in the U.S. as direct income, which offers a much higher rate than capital gains tax normally reserved for traditional assets.
The Role of Coinbase Custody And Bison Trails
The new members of POSA will be helping the alliance to amend this regulation, as both organizations are deeply invested in the staking ecosystem by providing customers with the means to stake their assets.
A white paper drafted by Abraham Sutherland, a professor at University of Virginia School of Law, argues that the existing treatment is unfair.
In addition to its work on tax regulation, the alliance is also engaging with regulators such as the SEC and FinCEN to work on issues related to securities and money services regulation.
Both Coinbase Custody and Bison Trails will assist POSA in its initiatives. Replying to questions about their specific contribution, Perona explained:
“[They will conduct] meetings on the hill with congressional representatives educating them on Proof of Stake based technologies and their potential use cases. Meetings with regulators (SEC, IRS, Treasury, FinCEN) educating them on the intricacies of the technology and building a regulatory framework that allows for the growth and adoption of staking based technologies. Taking part in working groups and helping implement best practices industry standards”
The alliance’s educational efforts do not include institutions, however. When asked whether POSA is making efforts beyond regulator outreach, Perona replied:
“Currently, POSA is focused specifically on engaging with regulators and policymakers and trying to build a regulatory framework that is conducive to the growth of the staking industry. Our individual members might be having those types of conversations [with institutions] but POSA is not focused on that nor is it a function of POSA.”
Compared To Traditional Banks, Crypto Lenders See Booming Growth
A lukewarm U.S. economy is making big banks like JPMorgan Chase struggle to produce fast loan growth – even with interest rates close to historic lows. Yet, in the white-hot cryptocurrency industry, lenders are burgeoning.
The Commerce Department reported Thursday that U.S. gross domestic product rose at a 2.1 percent annual pace in the fourth quarter, on par with the third quarter’s clip, even after the Federal Reserve cut interest rates three times earlier in 2019 to stimulate growth. For the full year, the economy expanded 2.3 percent, a slowdown from 2018’s 2.9 percent, according to the report.
If there’s any softening in the economy, it hasn’t been felt by lenders like Genesis. The New York-based trading firm that lends cash alongside cryptocurrencies like bitcoin said Thursday in a report that loans increased by 21 percent during the fourth quarter to $545 million, driven by demand from big investors as well as aggregators of smaller loans in Asia and Europe.
Such growth was more than 10 times the pace at New York-based JPMorgan, the biggest U.S. bank, where loan balances increased by 2 percent – roughly the same pace as the economy – during the period to $959.8 billion.
Only a few lenders can be found in the decade-old digital asset industry, and they are starting from a smaller base. There’s also a dearth of competition from established banks for loans to crypto traders and businesses, due to conservative risk-management policies and restrictions imposed by regulators. Since a cryptocurrency like bitcoin can be a highly volatile collateral for loans, more traditional lenders are rare.
But crypto lenders are seeing strong demand from borrowers who want loans denominated in bitcoin, cash or “stablecoins” – digital tokens like tether and USD Coin whose price is linked to the U.S. dollar or other government-issued currencies. And there are plenty of investors willing to pledge cash to lenders like Genesis in exchange for interest rates of 7 or 8 percent.
BlockFi, a big crypto lender backed by the investment funds Galaxy Digital and Winklevoss Capital, said earlier this month it planned to add five to 10 new assets to its platform, including the cryptocurrency litecoin and a dollar-pegged digital token, USD Coin. Later this year BlockFi plans to launch a credit card that offers rewards in bitcoin.
Celsius Network, another crypto lender, said in December large institutional clients were becoming an increasingly key contributor to the platform’s loan growth.
“Obviously the crypto sector is not even a beauty mark right now compared with the banking sector, in terms of the size and maturity,” Genesis CEO Michael Moro said in a phone interview. “But there is rapid growth in this new market, and it’s not just us. There are other companies trying to accomplish similar things.”
Genesis is controlled by the crypto-focused investment firm Digital Currency Group, which also owns CoinDesk.
Bitcoin, the oldest and largest cryptocurrency, surged 94 percent in 2019, more than three times the gains in the Standard & Poor’s 500 Index of large U.S. stocks over the period.
So far in January, bitcoin is up another 30 percent to about $9,300, the best start to a year since 2013. Earlier this month, the professional-network website LinkedIn named blockchain – the cryptographically-enabled computer-network technology underpinning cryptocurrencies – as the most in-demand skill among employers.
Silvergate Capital, one of the few banking companies serving crypto-related businesses, said Wednesday total assets were flat in the fourth quarter at $2.13 billion. But the La Jolla, California-based publicly traded company said it added 48 digital currency customers during the period, bringing the total to 804, while transactions on its digital Silvergate Exchange Network rose by 17 percent from third-quarter levels.
A recently announced initiative at Silvergate will allow customers to obtain U.S. dollar-denominated loans collateralized by bitcoin.
Genesis said in its latest report a new source of demand for cash loans in 2020 could come from “mining” companies that need capital to build, expand or upgrade data centers used to process transactions on the bitcoin blockchain.
“We will likely see miners leverage their existing balance sheet and treasury to source the cash necessary to invest in their operation,” according to the report. “Those unable to source cash will be stuck mining on old-generation machines and might face serious profitability issues if the price of bitcoin doesn’t rise substantially.”
Genesis Crypto Lending Firm Hits New Record In Loan Originations In Q4 2019
Over-the-counter digital currency trading and lending firm Genesis closed the fourth quarter of 2019 with record high results in loan originations since its inception.
Per a Jan. 30 press release, Genesis facilitated over $4.25 billion in loans since its incorporation in March 2018, which made Q4 the best in company history. Genesis originated more than $1.1 billion in loans and borrows for its institutional customers, with total active loans of $545 million, showing a 23% increase compared to $450 million in Q3.
Genesis noted an increase in its active loan book and originations despite a 14% decline in the Bitcoin (BTC) price and other digital assets. The amount of borrowings in U.S. dollars also continued to grow and constituted 37% of the company’s active loan portfolio in Q4 2019.
Crypto Loans Market Highlights
As of December 2019, the entire crypto loaning industry was estimated to be worth $4.7 billion and the number of crypto loan platforms was growing rapidly, according to a report made by blockchain company Graychain Ltd.
While lenders had only earned a combined $86 million in interest since 2018, the demand for cryptocurrency loans was growing. In Q1 2019, over 5,400 new loans were issued, and in the second, at least 18,500. The volume of lending also increased, with lenders issuing $64.8 million in loans in the first quarter and $159.3 million in the second.
Just recently, major cryptocurrency lending company BlockFi added support for Litecoin (LTC) and USD Coin (USDC), and crypto lending and borrowing platform Celsius announced that it would be implementing compounding interest on cryptocurrencies deposited in its wallet.
How Fund Managers View Lending And Staking: 3 Takeaways From A CoinDesk Research Webinar
Not everyone is totally excited about DeFi.
Volatile crypto is nurturing its fixed-income side. Crypto lending activity is growing on decentralized finance (DeFi) networks. Staking, where investors reap payments for locking up assets in functions essential to network protocols, is moving into crypto’s mainstream, with large crypto exchanges offering staking services for users.
There’s some irony in this, like a penny stock offering a dividend, but both lending and staking are emerging as potential factors in investment decisions for crypto investors. In December, we invited two fund managers, both long bitcoin and other crypto assets, for a CoinDesk Research webinar on lending and staking.
Jordan Clifford of Scalar Capital and Kyle Samani of Multicoin Capital joined us to discuss how they evaluate risk and returns in crypto lending and staking, what crypto assets’ risk-free rate might look like and what DeFi needs to do to attract investors and new users.
1. DeFi Risk Factors Keep Some Investors Out.
Clifford and Samani had a back-and-forth about the decision to put assets to work in DeFi networks that earn returns. From Clifford’s perspective, the technology risks are manageable; Samani said at this point the returns don’t justify the risk of losing investor funds to a “smart contract” glitch, for any allocation of assets to DeFi.
Here’s Clifford on how Scalar evaluates risks. He mentioned bug bounties, security audits and formal verification as ways DeFi networks can de-risk themselves as platforms for earning fixed-income returns on crypto. Human risk is a factor, too: “You really are thinking about counterparty risk as the main one. … And that comes in many forms, actually.
Many of these DeFi contracts, they have administrator access that can do various things with those funds at the contract level. This is kind of an early stop-gate for many of these smart contracts to go live before they can be truly decentralized. That’s something to think about. It says it’s a DeFi protocol but often there’s a single organization that has keys to it.”
Whether or not there’s human counterparty risk to consider, there’s always technological counterparty risk, Clifford said, which can be evaluated along the lines of a Lindy effect: “Often, the smart contracts themselves, they act as a counterparty in a way, and they need to be vetted for technology risk. … What you’re really looking for is smart contracts that have had a lot of value custodied within them. The more time that’s elapsed, the safer it tends to be. If the contract’s held a billion dollars for several years the odds of it having a serious vulnerability diminish over time.”
For Samani, current interest rates on DeFilending networks don’t justify the risks, which include potentially having to send an email to investors explaining how the fund lost their money.
“It wouldn’t be meaningful to our portfolio, so it just wasn’t worth the time,” he said. “What rate would be meaningful? Samani said Multicoin hasn’t made that determination, yet. Is it a 1 percent premium over centralized? Is it a 2 percent premium? At what point are we willing to underwrite that? We’re not there yet; we hope to be there in the next six to 12 months.”
Samani said he’s not bullish that decentralized lending will be able to offer substantial premiums over centralized. “There are always going to be people who will bridge that arbitrage,” he said.
2. What Is Crypto’s Risk-Free Rate?
Decisions about what’s a meaningful rate come down to a premium earned for risk taken. This is usually calculated in reference to a “risk-free” rate. Of course, no investment is risk free, and that applies acutely in crypto assets. However, conversation in our crypto lending webinar turned to risk-free rates in crypto and how staking might play a role in determining such a reference point for pricing risk.
“In general my expectation is that lending and borrowing rates will be higher than staking rates,” Samani said. “I think for the most part staking rates, at least within each ecosystem, will be considered the risk-free rate.”
Factors like staking protocols’ programmed unbonding period make it different, but there will be workarounds to such lockups, Samani said. For example, exchanges offering staking services may be able to return capital to their users more quickly than direct staking would allow.
Staking isn’t free of risk by any means, Samani said, but it eliminates additional layers of risk on top of holding the asset itself.
“It’s native to the protocol,” he said. “There’s very few things that are native to the protocol and that is one of the things. My sense is, why deal with borrowing and counterparty risk when you can just rely on the protocol? You’re already relying on the protocol anyways, so if you’re going to rely on the protocol and add counterparty risk you should be compensated for that.”
3. What DeFi Needs In Order To Grow.
Samani wasn’t bullish on DeFi, either. “It’s pretty clear now that it’s pretty circular. There’s not too many people actually using the product. … The upper bound here seems to be the market cap of ETH or some fraction of that,” he said.
Clifford said DeFi needs better user interfaces and applications: “We need to polish off the rough edges, get more time, have people talk about their success stories,” he said. “I think organic growth will come, it’s just going to take a little while.”
Samani thinks DeFi’s growth challenges are more fundamental. Crypto-collateralized loans aren’t interesting beyond the bounds of existing ethereum investors. Uncollateralized loans, serving people excluded from the traditional financial system, would achieve that; they may not be practical without additional technology, like sovereign identity and credit scoring that can cross borders and operate outside traditional financial systems, he said.
Bitcoin DeFi Looms Closer As RSK Launches Ethereum Bridge
The RSK project announced the creation of Token Bridge, an interoperability protocol between the Bitcoin-pegged sidechain and Ethereum, on Feb. 6. It could have important implications for the burgeoning decentralized finance (DeFi) ecosystem.
RSK is a smart contract platform attached as a sidechain to the Bitcoin (BTC) blockchain. It uses a wrapped version of Bitcoin called rBTC as its native token. Users acquire the token by depositing BTC into RSK’s bridge wallet, which works as a two-way peg.
The team has now opened a similar bridge for the Ethereum blockchain. It allows a two-way transfer of any token between the RSK and Ethereum ecosystems. This means that Ethereum users can transact with wrapped representations of RSK’s rBTC and RIF tokens, thus gaining indirect exposure to the Bitcoin ecosystem. The same goes for RSK users, who are exposed to Ethereum-based stablecoins such as DAI.
How Does It Work?
When a user deposits a token from either blockchain to an address provided by RSK, an equivalent amount of the appropriate Side Token is minted in the other chain. The Side Token is written according to the ERC-777 specification, a newer token standard that is backward-compatible with the highly common ERC-20 specification.
Any standard token on either blockchain can be ported to the other through the bridge. The total supply does not change from this operation, as the original tokens are locked up until their mirror image is redeemed.
Cointelegraph reached out to Adrian Eidelman, RSK Strategist at parent company IOVLabs. He explained in more detail how the bridge works, revealing that the current system is not yet fully decentralized.
Eidelman said that to connect the two blockchains together, a federation of “well-known and respected community members” oversees the peg process. The procedure is triggered when developers on either chain interact with the bridge smart contract. Using Ethereum as an example, he explained what happens:
“The original tokens will now be locked on the Ethereum chain, and an “event” is created. At this point, the federation initiates the bridge and sends the information to the RSK chain. Once 50% or more of the federates have voted for the same transaction — the bridge on the RSK chain creates RRC20 tokens for the same amount locked on Ethereum.”
The team does not consider this a fully decentralized measure, but Eidelman reassured that the system should reach “full decentralization” by the end of Q3 2020.
Potential For Bitcoin DeFi
The DeFi movement is largely limited to Ethereum and its token ecosystem, where it recently surpassed $1 billion in locked assets. ETH is used as the main collateral asset to generate the DAI stablecoin through its complex lending system.
Nevertheless, Bitcoin-based DeFi is often considered DeFi’s next frontier. In a November 2019 interview with The Spartan Group, MakerDAO’s founder Rune Christensen said:
“When it comes to a solid decentralized collateral, I think ETH is king. The only thing that can come close to ETH in terms of its importance is of course Bitcoin.”
But Bitcoin has very limited smart contract functionality, which severely limits this use case. Christensen noted that porting Bitcoin into Ethereum would allow for it to be used as collateral, pointing to existing solutions such as Wrapped BTC (WBTC).
However, WBTC’s transfer process is custodial, instead of being a decentralized atomic swap. He explained that “it is essentially impossible to build more decentralized cross-chain solutions.”
The Only Available Solution, According To Christensen, Is To Have Many Providers Of Bitcoin On Ethereum:
“The way that we have to try to solve that with Maker is rather than just for WBTC to be the sole source of Bitcoin on Ethereum, we want to have hundreds of different versions of wrapped Bitcoin.”
Thus the release of RSK’s Ethereum bridge could be an additional step toward Bitcoin-collateralized DAI living on Ethereum.
Though Maker is the biggest decentralized stablecoin provider, it is not the only one. Money on Chain is a similar project built on RSK, which uses rBTC for collateral. The project already expressed interest in using the RSK bridge to enter the Ethereum ecosystem.
RSK also sees a potential use case for Ethereum DeFi to transfer to its platform. Eidelman claimed that the Ethereum market is “experiencing many difficulties,” pointing to higher fees and lower capacity. The project sees itself as an extension of Bitcoin, which it believes is the “strongest ecosystem in the blockchain space.” Despite the close association, RSK is still its own network.
Bitcoin DeFi could be close, but it seems unlikely that it will be based on the Bitcoin blockchain.
Value Locked In Crypto DeFi Markets Hits $1 Billion Milestone
With Ether (ETH) breaking through the $200 mark yesterday, $1 billion in value is now locked in the DeFi markets.
As of Feb. 7, ETH is trading close to $220 — up 4.5% on the day and almost 22% on the week.
Broadly speaking, DeFi is shorthand for decentralized finance, referring to the use of blockchain, digital assets and smart contracts in financial services such as credit and lending.
According to analytics site Defipulse.com, the $1 billion locked in the markets — i.e. across the spectrum of smart contracts, protocols and decentralized applications (DApps) built on Ethereum — is almost 60% denominated in MakerDAO’s DAI stablecoin.
Defipulse stats reveal that one year ago today, the value locked in DeFi was roughly a quarter of what it is now, at $276 million.
As it celebrates the milestone, some in the Ethereum community have pointed to the role played by the Bitcoin (BTC) lightning network, which accounts for 1.7% of the value ($8.5 million) — making it into the top ten digital assets used for DeFi contracts and applications:
As the site notes, the total value figure is calculated hourly by pulling the total balance of Ether (ETH) and ERC-20 tokens held in DeFi smart contracts and multiplying these balances by their spot prices in USD.
ETH Price Correlation
As Cointelegraph reported last fall, while the dollar value chart of digital assets locked in DeFi shows some correlation to Ether’s price, it is not entirely dependent on it.
After falling with Ether’s price in July 2019, the value of assets locked in DeFi apps resumed its growth even as the altcoin’s price continued largely to fall. In a short time period, the correlation is tighter.
Bitcoin Lender BlockFi Raises $30M In Series B Led By Peter Thiel’s Valar Ventures
Fresh on the heels of an $18.3 million Series A funding round in August, crypto lending startup BlockFi has secured a $30 million Series B.
Announced Thursday, the new funding will help the firm expand both its product offering and geographic footprint.
“We decided to opportunistically raise the Series B to expand the balance sheet and give ourselves the ability to invest in the things we’re doing this year,” BlockFi CEO Zac Prince said in an interview.
The Series B was led by Peter Thiel’s Valar Ventures with participation from repeat investors Morgan Creek Digital, PJC, Akuna Capital, CMT Digital, Winklevoss Capital and Avon Ventures. New investors included Castle Island Ventures, Purple Arch Ventures, Kenetic Capital, Arrington XRP Capital and HashKey Capital.
Having Hong Kong-based HashKey as an investor will help BlockFi expand into Singapore later this year, Prince said. While the company has been serving customers in the region, this would be its first physical presence there.
In the Asia-Pacific region, BlockFi expects to attract a lot of institutional customers, Prince said, given the number of mining companies, asset managers, exchanges and market makers that exist there. BlockFi also plans to begin attracting more retail customers in the region as it translates its site and products into local Asian languages.
In the first quarter of this year, the startup plans to develop a mobile app and the ability to send fiat wire transfers. In Q2 2020, BlockFi plans to offer Automated Clearing House (ACH) payments.
It also expects to double the size of its 75-person team by the end of 2020, Prince said.
BlockFi has been providing fiat loans with bitcoin (BTC) and ether (ETH) collateral since the beginning of last year. In March, it launched a service offering clients interest on their crypto, which the company then loaned out to institutions. BlockFi has had to cut rates more than once because borrower supply has not been able to meet depositor demand.
The firm reports having more than $650 million in assets on its platform, a 160 percent increase from the $250 million in assets it reported in August, with a 0 percent loan loss rate.
Last month, BlockFi announced a slight reduction in yield for customers lending bitcoin and ether, caused by a more bullish crypto market.
DeFi Begins To Move From A Sub-Niche Market To Mainstream Finance
In one year, the total value of Ether (ETH) locked in DeFi markets has increased from $317 million to over $1 billion. With the increasing level of activity in the market sector, the next logical progression appears to be focused on making DeFi solutions more mainstream.
However, like other decentralized apps, DeFi protocols still have issues with usability among everyday users. Factors such as liquidity and governance could also hold serious implications for introducing DeFi products to the broader financial market.
With lending products occupying the greater majority in the current DeFi ecosystem, DApp developers have to consider real-world hitches like loan repayment and defaults. Also, the volatility of crypto prices that act as collateral can exert significant stress on the market.
Currently, solutions like multi-collateralized and non-collateralized lending appear to be gaining some popularity in the market. However, these systems might still require more robust stress testing to evaluate their effectiveness in dealing with internal and external stressors.
Apart from handling price instability, a larger DeFi market could mean greater regulatory scrutiny and more significant competition with legacy finance systems. The crypto market as a whole continues to be subject to even tighter regulatory standards with Anti-Money Laundering being a major focus for governments across the world.
DeFi Market Growth Crosses $1 Billion Milestone
As previously reported by Cointelegraph, the total ETH value locked in the DeFi market has crossed the $1-billion mark. Data from analytics platform Defipulse.com reveals that the current value of the market represents an almost-300% increase from 12 months ago.
In an email to Cointelegraph, a spokesperson for the Maker Foundation highlighted the growth rate of the DeFi market, stating that the pace is exciting, adding: “I believe it speaks to the shared human desire to have more control over critical elements of our lives, like our financial futures and opportunities.” Akiva Lai, chief product officer at blockchain governance and auditing platform Maxonrow, highlighted the significant growth in the DeFi market for Cointelegraph. According to Lai:
“It’s pretty astounding, to be honest. $1 billion in locked DeFi value may seem minuscule compared to legacy finance, but we need to examine it for what it could be — not what it currently is. Paired with the ballooning growth of exchange products, from derivatives to staking services, and it’s only natural that more users will tap DeFi products in the never-ending search for yield amid an uncertain economic backdrop of negative interest rates and slow growth.”
According to Defipulse data, lending DApps command the largest share of the DeFi market, and MarketWatch forecasts that the lending market will reach a valuation of $8 trillion within the next two years. For Jonathan Loi, founder of derivatives exchange platform Level01, the DeFi market is on course for continued growth. In a private note to Cointelegraph, Loi said that the pace of growth is a vote of confidence, adding:
“The majority of value is staked in lending protocols: Because of these protocols collateralized and transparent nature with potential dividend upside, it becomes attractive to investors leading to the quick pace of adoption. Other industries such as financial trading is also gaining pace as evident in the growing interest in direct P2P trading platforms that facilitates transparent and autonomous settlement for the trading of options contracts.”
Lending Holds The Lion Share
Indeed, MakerDAO’s DAI stablecoin accounts for more than 60% of the DeFi market. Thus, lending controls the greater majority of activities in ETH-based decentralized finance. Other major lending products include Compound, InstaDApp and dYdX.
The popularity of lending within the DeFi market space comes as no surprise, given that the total crypto loan industry currently stands at about $4.7 billion. As previously reported by Cointelegraph, the presence of higher interest rates within the sector is driving adoption.
The robust growth in the crypto loan industry comes despite the bear market conditions that characterized the crypto scene in 2018 and 2019. Even with the close to 90% drop in the underlying collateral (usually ETH), crypto loan products have shown some degree of robustness.
DeFi lending proponents will be hoping that such resilience will be pivotal in attracting greater institutional interest in the market. Lai of Maxonrow is of the opinion that DeFi-based lending products could be major drivers for the market as a whole, telling Cointelegraph:
“The biggest impact areas will likely continue to be borrowing/lending because debt is such an integral component of a growing economy. However, collateralized loans still preclude many poorer people from the financial system without collateral to offer, so developments that can lower the barrier in terms of friendly rates and maybe non-collateralized crypto lending are important.”
With greater penetration of DeFi lending, certain market realities like bad debt and loan defaults could come to fruition. Developers and entrepreneurs in the industry will have to contend with the effects of such stressors not only on their products but on the entire crypto market when having to liquidate the collateral backing the bad debt.
According to the Maker Foundation, it is the responsibility of regulated lenders to do their due diligence while offering services to customers. As part of its email to Cointelegraph, a spokesperson for the foundation explained:
“Maker provides the building blocks along with the built-in checks and balances for regulated organizations to provide financial products like loans. Consequently, a regulated loan originator would integrate Maker’s architecture to issue loans that they ultimately are responsible for operating. Originators would do so with the full knowledge that Maker uses a collection of smart contracts to ensure the system on the backend remains secure and robust.”
For Michael Gasiorek, head of growth at stablecoin platform TrustToken, overcollateralized loans will give way to undercollateralized loans as market risks become better understood. Writing to Cointelegraph, Gasiorek explained that they will require to be backed by something additional to crypto, like the trading/loan history reputation, Know Your Customer or AML information, or lead to the creation of a credit score system:
“These opportunities will become mainstream only once the mechanisms, returns and risks are well understood and will most likely happen slowly as institutions (the real mainstream when it comes to making loans at eye-popping quantities) watch crypto-savvy consumers test the market and technology.”
DeFi Moving Toward Mainstream Adoption
The question for DeFi as it moves toward mainstream adoption is whether the emerging market will seek to dislodge legacy systems or run concurrent perhaps maybe even collaboratively with mainstream finance. For Lai, the latter appears most likely:
“Crypto and DeFi won’t subvert conventional finance, it will coexist — with some hybrid components shared between the two. Who knows, maybe in the future, banks will rely on DeFi lending platforms to manage repayment, collateralization and debt swaps while building the liquidity fail-safes and regulatory components (e.g., KYC) on their back-end.”
A mature DeFi market brings with it the possibility of more flexible options for retail investors with some products likely possessing useful trade-offs in comparison to legacy systems. For Alex Melikhov, CEO of stablecoin platform Equilibrium, DeFi’s march toward greater global adoption follows two paths. Writing to Cointelegraph, Melikhov anticipates two scenarios:
“The first is a long-awaited mass adoption that goes beyond the retail approach. This scenario requires that DeFi developers and entrepreneurs have more usability, wider community education, UX simplification, and so on. At some point, we will see ordinary households investing in liquidity pools on Compound.”
According to Melikhov, the second pathway is more sophisticated, and it involves developers expanding their focus from building financial primitives toward more cutting-edge DeFi-based offerings, like the multiple Dai extensions already on offer.
But, to achieve mainstream adoption, DeFi might also need to undergo a simplification of many of the available products. To this end, developers may need to consider on-ramps that ease the transition between fiat-based systems to more digitized marketplaces.
Pain Points For Decentralized Finance
While developers and entrepreneurs work toward enhancing the penetration of the DeFi market, these DApps still require some work in making them more suitable for everyday users. Several commentators agree that improvements of the in-app user interface remain a key factor not just for DeFi products but for blockchain DApps in general.
Regarding the issue, Lai told Cointelegraph: “The problem with DeFi right now is that it’s really only used by crypto enthusiasts in developed countries.” Likewise, Gasiorek identified UI issues as one of the four pain points for DeFi:
“The user experience needs to dramatically improve so as to be usable by the non-crypto layperson from both the user interface and ‘requisite starting knowledge’ level.”
For Gasiorek, moving past the usability hurdle will allow stakeholders to focus on matters like liquidity, which becomes even more significant once scalability increases. Then comes the need to properly gauge the risks associated with the market and the creation of robust regulatory provisions to prevent the emergence of problems like a crypto collateral loan bubble.
The growth in the DeFi market marked one of the main developments in the crypto market for 2019. The focus for 2020 appears to be one of consolidation and more gains that could put the industry in the spotlight of financial regulators, given the increased level of attention being paid to the crypto space.
Ethereum Based Fulcrum Platform Loses 350K USD In ETH
Ethereum-based lending platform Fulcrum has lost 350K USD in ETH due to a flaw in a smart contract that was exploited.
The platform has been shut down for “maintenance” and an investigation is underway to determine details.
The Ethereum based lending platform Fulcrum has fallen victim to a malicious attack. The attack occurred between February 14 and 15 when the attackers took advantage of a vulnerability in the platform’s lending protocol.
The attack occurred in several stages. First, the attacker took a 10,000 ETH flash loan. Then, he used half of the ETH to obtain another loan in wrapped Bitcoin (wBTC) through the Compound protocol. The other half of the ETH went to Fulcrum as collateral in a wBTC bet. The attacker bet that the price of the wBTCs was going to short. The attacker then dumped the wBTCs on Uniswap and caused the price to fall to collect the profits from the short on Fulcrum and pay off the initial flash loan.
The Fulcrum platform was shut down while investigations are underway. Fulcrum is a UX-focused dapp for lending and trading launched in June 2019. The dapp uses the decentralized bZx protocol that allows its native dapps to trade and lend on margin and leverage.
bZx Offers Details Post-Mortem
The attack on Fulcrum was complicated by several reasons. The company behind the platform, bZx, was in a hackathon with the Ethereum community. Therefore, bZx’s responsiveness was delayed.
bZx co-founder Kyle Kistner offered a statement on February 15. Kistner claimed that there was a breach against the contract and a portion of ETH was lost in the process. The loan contract was paused for all operations. Kitstner claimed that no further funds were compromised, but did not offer a specific figure on the amount that was lost. It is estimated that the attacker could have made a profit of 350K USD in ETH.
The company behind bZx said that due to the complexity of the transaction it takes time to understand exactly what the losses are. Furthermore, it claimed that the attacks were not just a swap in Uniswap and that bZx does not use Uniswap as an oracle. bZx claimed:
We have deployed a contract upgrade that we believe will make our system more robust against these type of actions in the future. The upgrade is currently being processed through our timelock. It will pass through in the next 12 hours. At that time we hope to restart the UI.
The company reiterated that users have zero losses. bZx also revealed that the attacker left 600K of wBTC as collateral:
We will be using this to stream interest and exit liquidity to existing iETH holders. This will be done using our admin key. This is an extremely difficult decision for us that we don’t take lightly.
It is estimated that Fulcrum will be back online at 10:30pm MTS. They will then publish a more detailed report on the attack and its complexity. However, the company was criticized by many Fulcrum users. Some demanded more transparency about the facts and others criticized the use of the administration key. This mechanism gives bZx full control over the contract at Fulcrum.
The full report is still awaited for further details. In the crypto-community, the attack has been used to exemplify the vulnerabilities of the DeFi sector. MyCrypto founder Taylor Monahan stated:
Just because your code works doesn’t mean it’s safe.
Mind The Gap: Why ETH Price And DeFi Adoption Aren’t In Sync
In his 1991 book, “Crossing the Chasm,” management consultant Geoffrey Moore defined a crucial gap between the early adopters of a new technology and the larger populations of users that come later. Decentralized finance (DeFi) may now be approaching a gap of its own.
This article focuses on DeFi services that allow deposits of ether (ETH), ethereum’s native asset, as collateral for loans issued in a dollar-pegged stablecoin, DAI. Lending is decentralized to the extent it is managed by an open network of participants, governed by rules and incentives established in a computer program. Borrowers may deposit these stablecoins to earn income, convert them to cash or use them to make leveraged investments in ETH and other crypto assets.
DeFi lending’s gains are impressive, but their relationship to the ETH price bears watching.
Demand for DeFi lending services built on ethereum shows a pattern of inverse relationship to the price of ETH. When ether prices are falling, the amount of ETH locked in DeFi tends to rise. Most recent data indicate the relationship operates the other way, too. (Data is from DeFi Pulse via Concourse Open.)
If this apparent relationship persists, it may indicate a circular user adoption of DeFi lending that could be limited to a small percentage of the number of existing ETH holders. That is, existing DeFi lending offerings may not be sufficiently attractive to cross the chasm and draw new users into ethereum.
The early adopter in this analysis is the long-term holder of ETH, motivated by conviction that ETH’s value will increase in the future. For such investors, DeFi lending offers a way to earn income or free up capital, as outlined above.
Some of these uses, such as income-earning deposits and cash conversions, may accelerate during dips in price, explaining the apparent inverse pattern between ETH price and ETH locked in DeFi lending. A declining price increases the cost of selling under duress.
Leveraged buying is a possible exception, and proponents of DeFi lending point this way. “What DeFi is creating is a virtuous cycle where investors who have higher risk tolerance are locking up ETH to generate Dai and leverage long ETH,” Mariano Conti, head of smart contracts at MakerDAO, told CoinDesk Research.
Currently, Maker, the largest DeFi lending operation by ETH deposits, has a minimum collateralization ratio of 150 percent, meaning $150 worth of ether is required as collateral to borrow $100 worth of DAI. The leverage implied by this ratio is 1.67X.
Liquid derivatives markets like BitMEX, Huobi and OKEx offer up to 100x leverage on crypto assets including ETH. With these options before them, how many long-ETH investors are likely to choose DeFi lending as a means to leveraged trading?
It’s also difficult to envision adoption among a wider market of borrowers not yet initiated into crypto investing. Would a Main Street borrower purchase ETH in order to obtain a cash loan worth less than said ETH? Perhaps, if DeFi lenders could accept non-crypto collateral. This would not be a trivial development.
“I see lots of startups playing with identity type solutions to reduce collateral requirements, but I think these are a long ways out from meaningfully impacting the market,” Kyle Samani, managing partner of Multicoin Capital, told CoinDesk Research. “There are a lot of hard, intertwined problems to make this work.”
As for that inverse relationship between ETH price and ETH deposits in DeFi lending, if it persists it may indicate the category is approaching an adoption limit. If the inverse relationship is broken or reversed, that may signal DeFi lending has indeed found a set of use cases capable of bringing it, and ethereum, to a wider market.
Meet The Network Investor: A Venture Capitalist Who Invests In DeFi
As initial coin offerings and their derivatives continue to fade, venture investment in the space has steadily picked up pace. Cointelegraph sat down with Michael Anderson, co-founder of Framework Ventures, to learn more about his investment philosophy and outlook on the ecosystem.
Anderson’s most notable investments are Chainlink (LINK) and Synthetix, both of which grew tremendously in 2019. Predictably, he is quite positive about decentralized finance (DeFi), sharing his thoughts on the evolution of the ecosystem after a round of questions on venture investment in crypto.
Venturing Out To Crypto
Anderson came on the venture capitalist (VC) path by passing through tech companies first. Introducing himself, he said:
“My background largely stems from traditional technology. I started working at Dropbox, worked there for four years and then moved to Snapchat. For both of those companies I was a product manager, focused mostly on payments and commerce […] I’ve seen what it was like on the traditional side during the day, and then on nights and weekends I was studying, researching and playing around with all of this new novel technology.”
Together with his partner Vance Spencer he founded Hashletes, a company releasing non-fungible tokens. The company was later sold, with both of them subsequently founding Framework Ventures.
Anderson Explained What Compelled The Duo To Open An Investment Fund:
“One of the things that we realized when we were starting the firm is that there was a major gap for protocol investing. Traditional VCs were just buying and holding or biasing towards equity. Tech companies were building on top of these protocols or building protocols themselves.
Hedge Funds Were Just Trading These Or Thinking In Short Terms.”
The Framework founders believed that investing in protocols required a change of principles. For this reason, Anderson referred to his fund as “Network Capital,” in a wish to not be conflated with traditional venture investors.
The fund primarily deals with token-based investment, as “that is where most of the value accrue is.” But it also invests in company equity and builds tools on top of the protocols with which it is involved.
Crypto Investment Philosophy
Both Spencer and Anderson were active as angel investors in the years before founding Framework. That may explain why some of the fund’s principles have a lot in common with angel investment.
Anderson emphasized that Framework has a long-term vision for all the projects it invests in — even at the cost of delaying an exit. Despite the significant rallies that both Chainlink and Synthetix saw last year, the fund is still deeply invested in both projects.
When asked how Framework feels about investing in a space where companies and projects generally have little to no revenue, Anderson noted that “it is different and it requires a different mindset.”
While the fund will also invest in more traditional companies that have a clearly defined legal entity and revenue, Anderson believes that the value of an open network flows to its token.
Without clearly defined metrics, the valuation method of a project has to change as well. Anderson explained:
“The general idea of what we evaluate, frankly, has nothing to do with price. It has something to do with comparative price to other comparable projects. But frankly, all we look at is qualitative analysis.”
The project’s roadmap holds some weight in this analysis, allowing the investors to gauge its potential. Market evaluation is also crucial, with the duo identifying the importance of oracles and synthetic assets even before any investment.
Yet, the final investment decision still hinges on the personalities behind the project — like with angel-based seed funding. When discussing what compelled the venture fund to invest in both Chainlink and Synthetix, Anderson focused on the founders:
“Our view was that this guy, Sergey [Nazarov, founder of Chainlink], has been in the space since 2013. He’s tried to build smart contract platforms before, and Ethereum kind of beat him out there. So he knows what it’s like to go through the rigamarole. But then also the implicit backing of Cornell and the Cornell research team at IC3 […] That’s what gave us confidence in Chainlink.”
As for Synthetix, Anderson met with its founder, Kain Warwick, even before any kind of investment discussion:
“I ended up sitting next to Kain from Synthetix at a Chainlink dinner at ETHBerlin last summer. And I just got to know him and really got to know what he was about.”
Nevertheless, Framework’s broader investment strategy is dictated by its vision for the future of crypto.
Framework Ventures currently focuses on decentralized finance, a niche that has steadily grown in 2019. Anderson laid out the investment thesis:
“If we break down what blockchain enables in the core function itself, it’s trustless transfer of value. And when you have trustless transfer of value, its programmability is essentially what DeFi is.”
He added that he believes a broader Web 3.0 is still coming in the future, but DeFi is the current focus of the fund. Yet in its existing form, DeFi is mostly used for leveraged trading of crypto assets. As Anderson explained:
“A lot of the stuff that’s going on right now is almost recursive […] especially Maker. Over-collateralized loans as a concept is just a very inefficient model.”
Answering a question whether DeFi will branch out into non-trading use cases, Anderson replied: “Quick answer is yes. I think the bigger, broader question is when.”
He revealed that Framework is currently looking into under-collateralized loans, powered by social or identity checks.
As DeFi continues to mature, the space where Anderson currently sees the clearest potential is insurance:
“Insurance could also be a huge thing. Fifty percent of the cost of an insurance company, which usually has a one to two percent profit margin, is based around the headcount and the claims process. So if you can streamline even just a small portion of that 50% of the cost structure, there is a highly profitable insurance company coming out of there.”
Decentralized insurance is one of the potential applications of highly advanced oracles, and both Framework and Chainlink are aware of that, as Anderson revealed.
He envisioned a potential scenario where car sensors would pick up all the necessary data and send it to a smart contract for processing claims — streamlining the existing process. “Obviously, this is a further out vision than where we are right now,” he conceded.
When asked whether smart contracts and blockchain really have a use in this vision, he noted that an open network for insurance would have a strong competitive advantage over traditional companies, taking Geico as an example:
“I think one of the one of the benefits of having an open network is that you’re able to build the collateral pool that Geico currently has based on finding counterparties to underwrite risk. […] Geico […] has been around for almost 100 years, if not over 100 years. So they’ve been able to build this war chest of collateral. […] If we can bootstrap that in an almost peer to peer manner and in a distributed network, I think that’s a huge advantage.”
Celsius Joins Major Cryptocurrency Firms Using Simplex’s Fiat Onramp
Cryptocurrency businesses worldwide are continuing to integrate fiat onramps into their operations in an effort to make it easier for customers to jump into crypto.
United Kingdom-based cryptocurrency lending startup Celsius Network has launched in-app crypto purchases via a new partnership with Simplex, according to a Feb. 18 announcement.
Simplex, a popular fiat-to-crypto payments provider servicing major crypto exchanges like Binance, will now unlock direct crypto purchases for Celsius app users.
Celsius clients will now be able to buy cryptocurrencies like Bitcoin (BTC) and Ether (ETH) via credit or debit cards. Similar to other Simplex-powered fiat onramps, the new feature supports major credit card issuers including Visa and Mastercard.
The U.S. Dollar Is The Only Fiat Currency Accepted At Launch
Apart from providing Celsius users with in-app crypto purchases, the new partnership will significantly cut the cost of unloading Bitcoin on the platform. According to Celsius, the addition of Simplex cuts transaction fees by at least 50%, providing crypto purchases through credit cards at a 3.5% fee.
At launch, Celsius will only accept the United States dollar for the new payment option, a company spokesperson said in an email to Cointelegraph. Additionally, the amount of monthly crypto purchases will be limited at $20,000.
Founded in 2014, Simplex has emerged as a major crypto-enabled payment processor. On Feb. 14, Simplex unlocked 15 new fiat currency payment options for Visa and Mastercard purchases on major cryptocurrency exchange Binance. Previously, Simplex provided its services to major fiat-crypto trading platform OKCoin as well as Singapore-based crypto exchange KuCoin.
Total crypt loan origination on the Celsius Network reached $4.25 billion in late 2019.
Everything You Ever Wanted To Know About The DeFi ‘Flash Loan’ Attack
There’s now a case study for how DeFi can go awry.
bZx, the eighth-largest decentralized finance project according to DeFi Pulse, suffered two attacks last weekend following the introduction of “flash loans,” a new DeFi feature that limits a trader’s risk while improving the upside.
Led by CEO Tom Bean, the bZx team was attending ETHDenver, a major ethereum conference in Colorado’s capital, on Friday when an unknown attacker drained about $350,000 worth of ether (ETH) from Fulcrum, the startup’s lending platform. As a post-mortem from the firm describes, the attacker took advantage of pricing data and a bug within the bZx protocol’s code to secure the payout.
bZx quickly shut down Fulcrum using a decidedly non-decentralized master key. Users and analysts saw an update hit GitHub, the code repository, that supposedly locked down endangered funds.
Trading resumed over the weekend with the firm announcing its intention to contain the damage in a variety of ways, including liquidating collateral to pay a now-uncovered loan, building an insurance fund and spreading losses across platform users.
Despite the shocking incident, traders who had deposited money on bZx will barely feel the effects of the attack.
But that wasn’t the end of it. On Tuesday, Feb. 18, attackers hit bZx again, netting $633,000.
While the amounts of money lost are still relatively small for the world of cryptocurrency, the attacks demonstrate DeFi’s move into the big leagues and the attention it will now receive from manipulators and thieves.
If all this has been making your head spin, you’re in good company. Blockchain technology was complicated and abstract enough before people started building lending and trading services on top of it.
For the perplexed, CoinDesk offers the following explainer of the bZx hack and its broader lessons.
The New Frontier
As the name implies, DeFi, or decentralized finance, aspires to one day offer a democratized alternative to the legacy financial system, where individuals can obtain credit on a peer-to-peer basis without relying on banks or other middlemen. For now, though, it’s a playground for traders – and a rough one at that.
Since the participants don’t know each other, DeFi lending is all based on collateral. Digital assets such as bitcoin (BTC) and ether (the native cryptocurrency of the ethereum network) are notoriously volatile. To deal with this, DeFi lending applications such as MakerDAO let you borrow only 75 percent of your available collateral.
If the price of your asset begins to drop against the market, the smart contract underpinning the DeFi application will sell your asset at a certain spot price in order to protect the parties who loaned you money against your asset. Think of a pawnbroker who will only advance you $225 for an electric guitar worth $300.
The DeFi ecosystem also includes decentralized exchanges (DEX), where traders swap crypto assets without a central authority’s permission, their orders executed algorithmically on the ethereum blockchain.
Trading on-chain limits the range of assets involved to those that run on ethereum (native currency ether and various flavors of ERC tokens). But it allows sophisticated users to do some interesting tricks, as we’ll see shortly.
For a DeFi credit market to run properly, lenders must know the value of the collateral, so they need pricing information. This is data often gathered from crypto exchanges. In bZx’s case, the source was Kyber, a DEX.
The trouble is, crypto exchanges’ price information is all over the place.
Take as a loose example the spot-value differences between the top five exchanges by 24-hour volume for the most liquid digital asset, bitcoin.
Spot prices are often very different from one another because no single venue owns a crypto trade pairing product, said Sergey Nazarov, CEO of Chainlink, a crypto price data firm. Unlike in the traditional markets, where trading of, say, Apple shares happens only on Nasdaq, in crypto most anyone with the technical know-how can spin up an exchange on their laptop – in fact, that’s how the first exchanges started. Aggregating prices across such a fragmented market is a Herculean task, Nazarov said.
As in other financial markets, the wide discrepancy in prices also creates opportunities for traders to make money. Enter flash loans.
Too much information? For a simpler explanation, listen to our Markets Daily podcast.
Flash loans are a further innovation on top of DeFi and ethereum, the blockchain most often associated with the concept of “programmable money.” The product was first released by DeFi protocol Aave this January and then by bZx on Feb. 10.
In short, flash loans allow traders to take out uncollateralized loans to increase the payout of a singular trade. Returning to the pawnshop analogy, you can borrow the cash without surrendering your guitar.
Why would any lender agree to this, especially in a market where participants are anonymous? Because as the name implies, flash loans are paid back quickly – in the same transaction in which they are taken out.
Who would borrow money just to pay it back immediately? Clever arbitrageurs, that’s who.
As we’ve seen, different crypto markets have different prices for a given digital asset. A user can turn a quick profit by borrowing funds; buying low on one market; selling high on the other market; repaying the loan; and pocketing the profit.
Again, this is all done within the same on-chain transaction, since the markets are DEXs often running on ethereum. The arbitrageur just had to code all the steps into the same computer program, known as a smart contract.
To boot, flash loans are nearly risk-free, at least for the borrower. Since the ethereum network settles transactions atomically, meaning all transactions on a book execute or none do, a trader who cannot pay back his loan with his trade loses nothing.
Why? Because the transaction never occurs.
As Aave writes, all transactions, from the loan to the trade, take place at once on the network. If the network sees that a flash loan would not be instantly repaid, it will refuse every transaction associated with it, in effect canceling the whole thing. No harm, no foul.
If it goes through, however, everything is executed at the same time, resulting in a successful trade. The lender collects a small fee, the trader is richer. Everybody wins.
If only it were so simple.
As bZx’s weekend woes showed, flash loans can be dangerous when combined with buggy code, janky price feeds or both.
Instead of just buying low and selling high, the attacker or attackers used the borrowed funds to manipulate markets that were unusually vulnerable to it. In both attacks, bZx got the short end of the stick.
In the first attack, for example, through a complex web of transactions, the attacker pumped and then dumped WBTC (“wrapped bitcoin,” an ethereum token backed by actual bitcoin) on a DEX called Uniswap; took profits in ether; repaid the flash loan — and stiffed bzX on another loan related to the WBTC pumping.
“The magic under the hood is the fact how the Uniswap WBTC/ETH was manipulated up to 61.4 for profit,” according to an analysis by blockchain security firm PeckShield. “The WBTC/ETH price was even pumped up to 109.8 when the normal market price was at only around 38. In other words, there is an intentional huge price slippage triggered for exploitation.”
In this attack, a poorly set-up price feed certainly did not help, but the blame falls on the code, PeckShield CEO Jiang Xuxian told CoinDesk. Where a security wire should have been tripped as the price got out of whack, it failed to go off, Xuxian said.
The second attack came down to bad price data, specifically from DeFi network Kyber, bZx co-founder Kyle Kistner told CoinDesk. This time, the attacker focused on Synthetix USD (SUSD), a dollar-pegged stablecoin on the Synthetix Network.
The attacker borrowed 7,500 ether on bZx then pumped the value of SUSD on Kyber by swapping ether for SUSD. The purchase of so much SUSD caused the price to jump 2.5x the prevailing market rate of $1, writes PeckShield.
The attacker then took advantage of bZx’s dependency on Kyber for pricing data, putting up the SUSD as collateral for a large sum of ether on bZx; in fact, 2,000 more ether than the same amount of SUSD would have normally purchased on an open market.
After paying back the flash loan, the attacker reneged on paying back the under collateralized SUSD/ETH loan just taken out on bZx, resulting in a tidy 2,378 ETH profit and bZx holding buttons.
Lessons For DeFi
For smaller exchanges such as bZx, and DeFi in general, the pairing of innovative financial features like flash loans with systematic reliance on bad pricing data is exposing exchanges to new attacks, said Chainlink’s Nazarov.
“Do not use [a] single specific exchange as a price feed,” Nazarov said, “If it becomes thinly traded, people look at and they say, ‘Okay, this is how I’m building a product against this market or against that piece of data.’”
In fact, the specific attack against bZx was described months before it occurred by white-hat hacker Samczsun in a detailed blog post. As Samczun wrote at the time, hypothesizing an exploit involving bZx, the ethereum token known as DAI and another decentralized exchanges called DDEX:
“By relying on an on-chain decentralized price oracle without validating the rates returned, DDEX and bZx were susceptible to atomic price manipulation. This would have resulted in the loss of liquid ETH in the ETH/DAI market for DDEX, and loss of all liquid funds in bZx.”
Nazarov said the issue is not specific to bZx, but many exchanges within DeFi which rely upon a few on-chain pricing APIs. His firm is now working with bZx on addressing the issue, he added.
Kistner acknowledged the bZx team believed the oracle problems were considered fixed after Samczsun’s disclosures and even had the code independently audited. As Tuesday’s attack showed, the problems were not fixed.
“It’s terrible to have consulted with security professionals but then be made a laughingstock when you follow their advice,” Kistner said.
As Nazarov pointed out, you can have all the auditors in the world greenlighting your code, but if it is based on poor data such as on-chain pricing, failure is inevitable.
“The technical risk here is not just about contract code. The code can be fantastic and audited as much as you want. But what’s going on is that you’re creating new functionality which creates new surface areas which need to be secured,” Nazarov said.
Nazarov said the attacks, although unfortunate, are a lesson for DeFi in general. Pricing data is “a well-known architectural issue” that needs to be addressed, he said. “If you’re building an app that’s going to hold client funds, the fact that it’s automated is great, but it doesn’t mean that your work from a security point of view is done because the contract goes on ethereum.”
At bZx, the team has turned its attention toward securing the network. Kistner said trading will resume again shortly using Chainlink oracles for pricing, although no new users will be onboarded. For the future, Kistner said bZx will look at replicating the infrastructure of MakerDAO, the largest DeFi provider.
“When we are done revamping our internal processes, we want to set a standard for both security and transparency,” he said.
DeFi Insurance Firm Nexus Mutual Makes Its First Payout Following bZx Attacks
Insurance works in crypto so far, though it hasn’t had many big tests yet.
Not many people had insurance on assets locked up in bZx’s Fulcrum, but after a bug yielded an exploit of its smart contract, a couple of accounts that did were covered by Nexus Mutual, the London-based crypto insurance company.
Nexus Mutual is an insurance company that works as a cooperative (as any company with “mutual” in its name does), so there’s been lingering doubts that its members would actually pay out against valid claims. But after the post-mortem from bZx came out on Monday, two claims worth approximately $31,000 were paid out, according to the company.
“It’s never good that people are losing money because there’s a hack, but we are able to prove that the system works,” Nexus Mutual founder Hugh Karp told CoinDesk.
In a mutual insurance company, policyholders govern the insurance pool. In Nexus Mutual’s case, that means actually voting to render a decision on each claim.
The money in the mutual account is actually held by the people who hold the Nexus token, NXM. So the question has been: Will people vote to pay out of what is their pool of money when a valid claim gets filed?
Nexus did so, but only on the second try. The company detailed its logic in a blog post Wednesday.
Lasse Clausen, a founding partner at 1kx Capital and early backer of Nexus Mutual, is very happy the policies were honored.
“I do think it’s important that the mutual pays out so that people actually trust it,” Clausen told CoinDesk.
Nexus is a pioneer in insuring smart contract risk. Opyn recently launched a hedging option with similar benefits, but it has a higher collateralization threshold. Nexus, though it introduces more friction to policyholders, can likely provide policies more “capital efficiently,” Karp explained.
How Nexus Works
Right now, people can take out policies against any valid smart contract on ethereum. The policies are just bets against whether or not the smart contract will fail in some way.
“It’s not like an indemnity contract, where we only cover the actual loss,” Karp explained. That is, it doesn’t work like most insurance that retail customers would be familiar with from the analog world.
In fact, a person doesn’t even need to be a user of a smart contract to take out a policy. They just name an amount of insurance, a time period and a smart contract. Then Nexus gives them a price.
If an exploit occurs on a smart contract that mutual members agree represents a failure of the smart contract, then policies get paid out. In that way, it’s basically a bet on the soundness of a product.
All voters have to stake NXM to vote. In order to make sure mutual members participate, voters get paid in new NXM tokens to participate. New token emissions are proportional to the size of the payout, and only those who vote on the winning side earn the new emissions.
Nexus is a venture-backed company, whose lead investors are 1confirmation and Blockchain Capital. At launch in May 2019, three million NXM tokens were created and parceled out to the company and its investors.
More tokens can be purchased on the site at any time but they become more expensive when Nexus has its insurance obligations well-covered. When more policies get taken out and the mutual needs more funds, the prices drop to entice new investors to join in.
After a vote, token stakes only get slashed if the Nexus Mutual board determines malicious behavior. Otherwise, voters just get their stakes back.
“It’s very hard to determine the difference between a difference of opinion and a malicious outcome,” Karp said.
It took two votes to get to the payout in the bZx case.
As soon as the attack was found, claims were made on the Fulcrum smart contract. Mutual fund holders voted those down because at that point it looked like attackers had manipulated the oracles Fulcrum looked at, which didn’t count as a failure of the smart contract itself, in Nexus Mutual’s documentation.
“For the first attack, it’s a smart-contract vulnerability, which they subsequently fixed. This is basically based on my opinion as a smart-contract auditor,” Quantstamp’s Richard Ma told CoinDesk.
Then, on Monday, bZx released a post-mortem that admitted to a fault in its code, where a fail-safe failed. Once this was out, two claims were submitted – both second attempts from the prior round that had been rejected. These were both approved by token holders, as there was evidence of a failure of the contract itself.
Even without the bug, Ma said, the oracles remain a point of potential manipulation. As long as a smart contract can be tricked into thinking an asset is worth more than it actually is, an attacker could potentially borrow more than their collateral is worth.
“Any DeFi project that uses some DEX as a price feed, the same thing can happen to them,” Ma explained. “We audit lots of different projects and it’s definitely not easy for the projects to understand all the different ways they can be attacked.”
That said, Clausen of 1kx said ultimately the situation also illustrated the beauty of a crypto-style approach. “That’s the beauty of these on-chain smart contract systems, they immediately paid out. No shenanigans,” he said.
Karp said Nexus is looking at ways to insure against oracle attacks as well as other uniquely crypto risks, such as from hacks on centralized exchanges.
Here’s Why Interest Rates On Cryptocurrencies Could Be A Game-Changer
Lending and borrowing cryptocurrencies is becoming an increasingly important sub-sector of crypto finance, one that may end up shaping how the underlying assets themselves are valued and priced in the markets.
While still in its infancy, the growth of crypto lending platforms has given birth to a new type of measuring metric: interest rates, which has the potential to draw in new investors while encouraging the movement of crypto capital out of storage and into markets.
In traditional financial markets, interest rates reveal significant information about the health of the economy and form the basis for almost all asset valuation models. Whether it be for calculating expected return or present and future market value, the interest rate is a key variable based on the lending and borrowing of assets.
When individuals or businesses want to take out a loan, they normally have to agree to pay a percentage of the original amount borrowed back to the lender on top of the principal amount. This is what is called the interest rate.
Interest rates for cryptocurrencies incentivize users to loan out their crypto assets because users can earn a higher return lending their assets than they can storing them in a personal wallet or device.
Rates for lending cryptocurrencies coupled with strong demand for borrowing would free previously idle balances of capital for investing, trading and generating new market activity.
For all the benefits to investors and market activity growth that an active lending and borrowing sector would generate for the cryptocurrency industry, the sector is still in early stages of development.
Less than 0.01 percent of the total market capitalization of crypto was deployed in the third quarter of 2019 for collateralizing loans, according to figures by Credmark and Messari. To the nearly $1.5 billion in trade volume being generated daily, only $16 million was generated in crypto loan interest in the third quarter of last year, according to the most recent data from Credmark.
Other signs of sector immaturity besides low volume are high interest rate variance and volatility.
Interest rate variance
Interest on crypto deposits can vary by up to four percentage points, depending on the lending platform.
This variance exists in large part because of the difference in business models between lenders.
Service providers such as Nexo borrow cryptocurrencies from primarily retail customers and lend in fiat.
Others, such as Genesis, service large institutional clients and process loans in either crypto or fiat.
Decentralized finance (DeFi) lenders such as MakerDAO facilitate loans strictly financed in crypto and paid out in crypto. Each one of these lenders incurs different costs for processing and custodying funds. They also attract different client segments with varying expectations of fees and service levels.
Over time, companies with unsustainably high interest rates on lending cryptocurrencies will go out of business, as will other companies with uncompetitively low interest rates that fail to attract lenders.
The natural dynamics of the free market as applied to any industry weeds out inefficient business models and promotes standards of practice through competition. As the sector grows and consolidates, interest rates are likely to converge to sustainable levels.
Until then, borrowers and lenders will have to endure a high variance of rates, even within a platform.
Interest Rate Volatility
Interest rates on loans backed by and earned in crypto tend to fluctuate frequently, making any extrapolation of future value unstable. For example, interest rates on deposits for ether (ETH) paid to lenders have declined sharply from 1.3 percent to 0.01 percent on DeFi lending platforms Compound and dYdX in 2019.
Interest rates for ETH on centralized lending platform Celsius also saw a decline from 4.5 percent to 2.75 percent in the same year. This could be a result of low demand for ETH loans propelled by poor spot-market performance of the asset. Between June and December, ETH’s market price fell from a high of $334 to a low of $128.
Volatility in the lending and borrowing sector of crypto is not surprising given the high risk associated with the underlying assets. Data from woobull.com shows the annualized volatility of bitcoin (BTC), the cryptocurrency with the largest market capitalization and trade volume, is 17 percentage points higher than U.S. stocks as of Feb. 21.
However, price volatility for bitcoin has declined over time through increased demand and investor participation. As the number of loans either financed or earned in cryptocurrency grows, interest rate volatility is also likely to decline.
Asset Range Variance
It’s not just rates that vary widely from one provider to another, there is also considerable variance in the number of assets supported. In general, decentralized lending platforms such as MakerDAO, Compound and dYdX support a narrower range of cryptocurrencies than centralized ones, primarily due to the technical restrictions of decentralized finance protocols. These operate entirely on-chain, therefore any assets supported by the protocol must also be supported on the underlying blockchain network. This limits the number of options for a lending platform to only ERC-20 tokens if the platform is built on ethereum, for instance.
With new infrastructure facilitating blockchain interoperability and seamless asset transfer from differing chains, DeFi lending platforms could eventually support as many cryptocurrencies as centralized ones. DeFi lenders Compound and Nuo already support lending on wrapped bitcoin (WBTC) tokens, which are virtual representations of bitcoin on ethereum. Projects like Polkadot and Cosmos are actively building out functionality to support instantaneous transfer of all assets between blockchains.
Such technologies to support inter-blockchain activity are likely to pave the way for greater asset diversity on decentralized lending platforms and help reduce the asset range variance between cryptocurrency lenders. Without a large variance between lenders, there is greater opportunity for competition on the basis of loan terms and conditions rather than the number of supported cryptocurrencies. This will further drive convergence of variable interest rates, as well as solidify standards of business practice.
Currently, the cryptocurrency lending sector is immature, with variable and volatile interest rates across platforms as well as among different sets of supported assets. However, the sector is developing and growing rapidly. In the most recent Credmark report, the total amount of crypto borrowed by users of crypto lending platforms increased by 23 percent to $900 million in the third quarter of 2019. Interest generated on these loans increased by 24 percent from $12 million to $16 million in the same time period.
Through increased competition, consumer demand and technological innovation, variable interest rates on cryptocurrency loans have the potential to converge. As a fundamental valuation metric in the traditional financial markets, industrywide interest rates would be game-changing for the cryptocurrency industry.
Interest rates present a wide audience of investors unfamiliar with crypto with a compelling and straightforward metric to evaluate the digital asset class. In addition, interest rates would also encourage the movement of idle capital away from personal storage into use for generating more market activity.
Are The BZx Flash Loan Attacks Signaling The End Of DeFi?
Earlier this week, the decentralized lending protocol bZx was exploited in back-to-back “flash loan” attacks. While the two exploits were distinct, the end results remained the same. In total, $954,000 was gleaned from the platform. But what exactly happened? Was it an exploit, a simple case of arbitrage or a malicious attack? And where does decentralized finance go from here?
It hasn’t been a good PR week for the DeFi sector. For some, the movement promising an alternative to the legacy financial system is starting to look like a failed experiment. For others, the attacks amounted to little more than being caught on the wrong side of a trade. But regardless of semantics, whether these attacks transpired from a legitimate loophole or were the result of a premeditated attack, faith in DeFi is truly being tested.
The First Attack
On Feb. 14, the first exploit occurred. In a post-mortem compiled since the incident, bZx co-founder Kyle Kistner describes the exact moment the attack occurred. The bZx team was out for the ETHDenver conference — an Ethereum soiree that ironically celebrates the best of DeFi. Alarm bells started ringing when the team received information about a “suspicious” transaction. “We immediately returned home from the tBTC happy hour,” writes Kistner.
Kistner notified the members of the company’s Telegram group, explaining that an “exploit” had been executed on a bZx contract — which was promptly paused — and that a “portion of ETH” was lost. The actual amount harvested in the first incident totaled 1,193 Ether (ETH). Echoing the words of Binance boss Changpeng Zhao, bZx affirmed that user funds were “SAFU.”
Fortunately for its users, bZx operates on a failsafe — collecting 10% of all interest earned by lenders and aggregating it into an insurance fund. Consequently, the losses to bZx users are nominal. For the bZx platform, however, the attack came with a hefty reputational cost.
Pulling The Heist
But how did the attacker succeed in materializing a profit of 1,193 ETH from nothing? To use a somewhat reductive explanation, the attacker devised a network of transactions to execute a “pump and dump.”
Here’s How It Went Down:
First, the attacker took out a 10,000-ETH loan on the DeFi lending platform dYdX. They then split the loan between bZx and another lending platform known as Compound. The ETH sent to Compound was used to collateralize another loan for 112 wrapped Bitcoin (WBTC). Meanwhile, the 1,300 ETH assigned to bZx was used to short ETH in favor of WBTC.
Harnessing the low liquidity of a decentralized exchange known as Uniswap, which shares price data with bZx via DeFi network Kyber, the attacker managed to pump the price of WBTC on Uniswap through the WBTC short placed on bZx.
The antagonist then dumped the WBTC borrowed from Compound on Uniswap, taking advantage of the inflated market rate.
With profits in hand, the attacker paid back the original loan from dYdX in full and pocketed a cool profit of 1,193 ETH leaving bZx with an undercollateralized loan.
But here’s the kicker: Everything detailed above was executed in a single transaction — accomplished through a DeFi product known as a “flash loan.”
Flash Loans And Contract Bugs
Flash loans allow traders to take out a loan without any backing — i.e., they remove the need for collateral. They’re able to do this because the loan is paid back immediately. Arbitrageurs use flash loans in conjunction with smart contracts, which they code to carry out calculated arbitrage trades: the simultaneous buying and selling of assets in different markets.
Executed atomically, flash loans are marketed as “risk-free” as the Ethereum network rectifies any failure to pay back the loan by reverting the original transaction. As a result of their atomic nature, no party was able to intercept the flash loan attack while it was happening. Zhuoxun Yin, head of operations at dYdX — the exchange where the flash loan was borrowed — told Cointelegraph:
“We were not aware of anything officially until it all transpired. These transactions are all atomic, meaning the whole thing executes or fails.”
However, it wasn’t just flash loans at the attacker’s disposal. They also took advantage of vulnerabilities within the bZx smart contract. Kistner explained to Cointelegraph how the initial attack was allowed to occur:
“The first attack was fairly simple in that they made a large trade that ate into the funds of lenders. A flag was set higher up in the stack that allowed the trade to bypass a check on whether or not they were putting lender funds in danger.”
The bypassed check Kistner mentioned is the very same that former Google engineer Korantin Auguste refers to in his detailed analysis of the attack: “The attacker exploited a bug in bZx that caused it to trade a huge amount on Uniswap at a 3x inflated price.”
As it turns out, a crucial function to verify whether market slippage had occurred didn’t trigger. If it had, it would have nullified the attacker’s bZx position — rendering the trade ineffective. Instead, the attacker was allowed to continue unimpeded.
Four days later, on Feb. 18, bZx fell victim to yet another attack, forcing yet another protocol suspension. Similarly to the first, flash loans were used to facilitate a pump and dump on Uniswap — this time resulting in the attacker netting 2,378 ETH.
This time around, the attacker took out a flash loan of 7,500 ETH on bZx, trading 3,517 ETH for 940,000 Synthetix USD (sUSD) — a stable coin pegged one-to-one with the United States dollar. Next, the attacker used 900 ETH to purchase another round of sUSD on Kyber and Uniswap, pumping the price of sUSD on to over 2.5 times the market rate.
Then, using the now-inflated sUSD borrowed from Synthetix as collateral, the attacker took out a loan of 6,796 ETH on bZx. Using the freshly borrowed ETH and the ETH left over from the original loan, the attacker paid back the 7,500 ETH flash loan and once again skimmed a profit, this time to the tune of 2,378 ETH.
This left bZx with yet another under-collateralized loan. Luckily, this was covered by the insurance fund.
Blaming The Oracle
Rather than a repeat of the original bug, which was patched following the first attack, round two was apparently the result of oracle manipulation.
Oracles are blockchain-based intermediaries that feed external data into smart contracts. In this case, bZx’s price oracle relayed the inflated sUSD price without a verification, leading bZx to believe the loan of 6,769 ETH was fully collateralized. An analysis from PeckShield, a blockchain security firm, summarized the oracle exploit as follows:
“The oracle manipulation substantially drives up the price of the affected token, i.e., sUSD, and makes it extremely valuable in the bZx lending system. The attacker can then simply deposit earlier-purchased or hoarded sUSD as collateral to borrow WETH for profit (instead of selling or dumping).”
Yin notes that using Kyber (and by proxy, Uniswap) as a price oracle, bZx may have been asking for trouble: “Protocols should be using high-quality oracles, not on-chain DEXs directly as price oracles. Oracles that are powered by off-chain reporters would be safer.” He also pointed the finger at DEXs that support low liquidity assets:
“Many DEXs support assets that are very illiquid. Illiquidity means the markets can be moved a lot more easily. Liquidity needs to improve, which I’m confident will happen over time — there are technical and market factors that need to be overcome.”
Volatility coupled with low liquidity can prove to be a treacherous mix. In this instance, market slippage was inevitable, and the attacker knew it. Fortunately, since the incident, bZx has taken the decision to partner up with decentralized oracle network Chainlink and has made use of its price data.
Hack, Attack Or Legitimate Arbitrage?
For some, these cases amount to little more than a proficient arbitrage trade. However, the reality isn’t that simple. The attacker abused several vulnerabilities within bZx’s protocols, taking advantage of low liquidity markets and employing blatant manipulation tactics. Kistner, co-founder of bZx, told Cointelegraph that it’s a cut-and-dried case:
“It’s an attack because it used our code in a way that it wasn’t designed to produce an unexpected outcome that created liabilities for third parties.”
Sharing a similar opinion, Auguste maintains that no matter how you look at it, these were malicious attacks:
“In both cases, there were bugs exploited in the bZx code, so these were definitely attacks and cannot qualify as a clever arbitrage or something legitimate.”
Cointelegraph also reached out to Thomas Glucksmann, vice president of global business development at blockchain analytics firm Merkle Science. Much like the others, Glucksmann classified the incident as a hack, suggesting that it follows the same principles as theft by any other means.
However, he was quick to turn the spotlight back on bZx, insinuating that any attack vectors should have been patched sooner, especially given the lessons learned from the decentralized autonomous organization hack in 2016.
“Developers can typically avoid such scenarios by ensuring a thorough smart contract auditing process. It’s amazing that some teams still did not learn from the consequences of The DAO debacle and demonstrates the current fragility of DeFi services.”
Glucksmann didn’t write bZx off altogether, though. In terms of damage control, he says both the post mortem and the insurance fund go a long way to soften the blow.
What About DeFi As A Whole Now?
Following the last bZx attack, the DeFi sector reported a significant loss in locked-up assets, falling approximately $140 million from a peak of $1.2 billion on Feb. 18. Just weeks prior to the attacks, DeFi boasted a milestone $1 billion in total locked-up assets. This deterioration was especially prevalent in locked Ether where losses totaled around 200,000 ETH, according to data from analytics site Defipulse.com.
Nevertheless, Kistner doesn’t see these exploits as DeFi’s death knell. Instead, he suggests that it’s merely part and parcel of ecosystem development:
“NASA didn’t hire people who all wrote perfect code to launch space shuttles. What they had were rigorous processes in place throughout the entire development cycle of the code. We need to treat launching a DeFi DApp like we treat launching a shuttle into space.”
While DeFi is still in its infancy, the once-niche market continues to mature, clambering to the forefront of mainstream attention. However, the sector is operating without an adequate sandbox — an omission that is bound to provoke further hiccups.
For Glucksmann, while a greater emphasis needs to be placed on “battle testing” protocols before launch, discussions on appropriate regulation also need to be held. So, it is too early to write off the sector:
“To date, the only profitable business models in the crypto space were mining, exchanges and liquidity provision. DeFi services such as lending could be the next. A lack of regulation covering DeFi in many jurisdictions presents opportunities as well as risks, so users of DeFi services need to be willing to accept this for the time being.”
Arguably, due diligence procedures such as Know Your Customer and Anti-Money Laundering checks would go some way to disincentivizing bad actors. Though, given the inherently decentralized nature of DeFi, its proponents would likely revolt at the very idea.
Celsius Doubled Its Total Paid Crypto Loan Interest Since November
Celsius Network reports to have more than doubled its interest payments in the three months since its last disclosure. This is one more signal of the continuous growth of the crypto lending industry, as decentralized finance (DeFi) operations attract more funds.
As per its Feb. 20 report, Celsius paid over $11 million worth of Bitcoin (BTC), Ether (ETH) and other cryptocurrencies as total interest income. This is an increase of 120% from its $5 million figure reported on Nov. 12, 2019.
The company is managing $730 million in customer deposits and loan collateral, which is an increase of 62% from the last report’s $450 million figure.
The total value of outstanding loans has also increased by 46% since November, totaling $6.2 billion. This figure is counted in current BTC prices and is influenced by its price growth.
The user count has also grown from 50,000 to 75,000 since November.
Crypto Lending Growth
The crypto lending industry as a whole has been on the rise. It is divided into companies providing loans in crypto, such as Celsius and BlockFi, and decentralized finance based on Ethereum.
While both provide mostly the same services, DeFi uses smart contracts and blockchain oracles to power its lending activity.
The amount of funds locked in DeFi has recently surpassed $1 billion. Most of them are locked as collateral with MakerDAO (MKR) as part of a mechanism to generate Dai (DAI), a decentralized U.S. dollar stablecoin.
Celsius competitors such as BlockFi have also posted strong growth, showing that the lending industry is rapidly increasing its value.
The growth does not come without its pains, as DeFi protocol bZx was recently hacked twice in the span of two days.
The Celsius Network is continually expanding its feature set. It recently added an integration with Simplex to provide instant fiat on-ramps for its users. In January, it began offering compounding interest on users’ loans.
Celsius CEO Alex Mashinsky often shares his thoughts on the industry. In December he criticized the centralization of social media, pointing to blockchain as a possible solution.
DeFi Can Now Choose To Run Trustless Zero-Knowledge Proofs
In an interview with Cointelegraph at the Stanford Blockchain Conference on Feb. 19, Stanford University cryptography Ph.D. student Ben Fisch described Supersonic as a trustless zero-knowledge proof system, also referred to as a zk-SNARK.
Fisch helped create a trustless zero-knowledge proof system designed specifically for decentralized finance.
Trustless versus trusted zk-SNARKs
While zero-knowledge proof systems are needed for preserving privacy across blockchain networks, almost all require trusted-setups. Fisch said, “This means that users of the privacy tool must trust a third-party to configure the system properly.”
For example, the privacy-focused digital currency Zcash (ZEC) leverages zk-SNARKs to allow users to exchange information without revealing their identities. This means that Zcash’s blockchain only shows what transactions took place, rather than who was involved and what amounts were exchanged.
Although this ensures privacy and transparency of Zcash’s blockchain network, Fisch noted that Zcash relies on a trusted-setup zk-SNARK called Groth-16. He explained that trusted setups such as this could compromise the public trust of a system:
“In particular, zero-knowledge proof systems involve some randomly generated numbers. Trusted setups mean that the third-party must be trusted to generate these numbers properly and keep them secret (i.e., discard the secrets and destroy any trace so that nobody finds them out in the future). If the secrets are leaked then the security of the zero-knowledge proof system is compromised.”
Fisch further noted that trust can be spread over a collaborative committee in trusted-setup systems. This means that as long as one party properly discards their own secrets, the system can be considered secure.
While this has been done on several occasions through collaborative “ceremonies,” Fisch said it’s impractical to redo this for every new application requiring a zk-SNARK. “This is understandable because before this last year there were no practical universal-setup or trustless setup zk-SNARKs.”
Stanford Ph.D. student Benedikt Bünz, who co-authored a paper on cryptography and cryptocurrencies with Fisch, told Cointelegraph that unlike trusted-setup systems, Supersonic requires no trust from third parties at all. Bünz explained:
“In a trusted-setup, the person (or people) doing this can prove that an invalid transaction is valid. In a cryptocurrency, this could be used to create money out of thin air. Previous proofs without trusted setup were either in the hundreds of kilobytes or did not have the scalability property.”
Trustless zk-SNARKs For DeFi
According to Fisch, a trustless zk-SNARK like Supersonic is a major breakthrough in cryptography within the last year, especially as decentralized finance applications gain traction. Fisch explained that while blockchain is promising for financial systems to become more open and transparent in order to prevent Ponzi schemes and fraudulent activity, privacy is often completely destroyed.
Fisch noted that Findora, the company behind Supersonic, is primarily targeting financial use cases to bring decentralization and transparency to companies that require privacy, such as banks. He said:
“Many businesses can benefit from blockchain without decentralization immediately, but there is a benefit of having a trusted, decentralized financial network capable of connecting services and individuals using the same infrastructure.”
For example, Fisch noted that a peer-to-peer lending system based in China and the United States could run over Findora’s blockchain. He explained that commerce could run between the two systems with a consensus protocol that facilitates people using both networks while Supersonic ensures trust.
However, it’s important to point out that trusted-setup systems are not as efficient as trustless-setup systems. Fisch commented that Supersonic’s performance is about 10 times worse than trusted-setup systems, both in terms of proof size and computation time.
This is because one of the key components of Supersonic is a cryptographic tool called a “Group of Unknown Order.” Fisch added that a new GUO was announced recently, adding that “if we use this new GUO tool instead of the one we are currently using, then this will close the performance gap both in terms of size and time.”
Regardless of its current performance, Bünz mentioned that Supersonic has made a splash in upcoming DeFi projects like ETH 2.0, noting that the underlying tool used in Supersonic is the same as in verifiable delay functions:
“VDFs are a cryptographic tool that can be used to create perfect randomness, which is necessary for proof-of-stake networks. VDFs will be used in ETH 2.0. There is already a lot of investment in building good hardware and software support for VDFs.”
Recently, Ethereum co-founder Vitalik Buterin brought more attention to privacy solutions. When asked about Supersonic, Buterin told Cointelegraph that “Supersonic is a very good solution for the problem it’s trying to solve.”
Compound Extends DeFi Ethos To Itself, Launches Governance Token
Decentralized finance (DeFi) platform Compound is going ahead and decentralizing itself.
“My personal belief is that nobody would use bitcoin if it was run by the ‘Bitcoin Corporation,’” Robert Leshner, Compound’s founder, told CoinDesk in a phone call. “Its power comes from the fact that nobody truly controls it.”
In that spirit, Compound is launching the testnet of its experimental governance platform today, complete with a trial version of its COMP governance token.
Launched in late 2018, Compound has held steady as a top-three DeFi dapp on ethereum basically as long as DeFi Pulse has been tracking such things. (MakerDAO always sits at number one, while Compound and Synthetix bounce back and forth between two and three.)
Compound currently offers lending in eight different assets (such as wrapped-BTC, ETH and ZRX) and accounts for about 15 percent of all the ETH locked up in DeFi, lately hovering at around a billion dollars.
Community members who feel it should incorporate other assets will now have a much better chance to get their way, because updates will be a matter for users to decide (or COMP token holders, anyway).
“This has pretty much always been our plan,” Leshner said. “We’re one of the few companies that are pioneering the idea of continuous and progressive decentralization.”
The company is going to tokenize the dapp, but it is not doing it to raise more money. Instead, its staff, founders and investors will get a share of the tokens and another share will be distributed on ethereum using a logic the company is not yet revealing. Once that’s done, token holders will run Compound, not the company.
It should be noted, of course, that while the company itself won’t technically hold tokens, the people with the biggest investment in how it has been run so far will have a lot of sway. At first there will be a large concentration of the tokens in the hands of people closest to the company.
This fits into the vision Leshner described of decentralizing but doing so gradually, on purpose.
“Compound is more like a financial application and infrastructure layer than a blockchain. The accessibility of proposing changes to it is going to be much much more accessible,” Leshner said.
From here, Compound will focus on building services that run on Compound, much like the company Hadoop does with big-data software.
“We expect that the company will spend more time looking to develop services on top of the Compound protocol [rather than ethereum],” Leshner said.
How It Works
Anyone will be able to propose changes to Compound, but they won’t go to a vote unless 1 percent of the total token supply backs the measure. This could sound like a large amount but delegation is feasible. So someone wouldn’t need to own 1 percent of the supply to indicate that amount of support. They would just need to be able to rally that many tokens behind them to move a concept.
Leshner called the 1 percent rule an anti-spam measure. Meanwhile, quorum (the minimum number of votes in play needed to make a change go into effect) will be 4 percent to start.
Once votes start they will run for three days. Then the code change won’t kick in for another two days, just to give users of Compound time to close out their positions if they think the change is against their interests (also known as “rage quit” in crypto-governance circles).
According To A Medium Post On The New Governance Model:
“The entire governance codebase is available on Github, and has been audited by OpenZeppelin; an additional security audit is in progress, and will be released shortly. You can request testnet COMP from our team in Discord – just ask nicely!”
When the governance system first goes live, it will only be in the hands of Compound’s supporters and team. Once everything proves to be working, the firm will do a token distribution to the public, who will then be able to participate.
The hope is that more people involved will enable the app to expand more quickly but also to do so in a safe way, in part by getting more people involved.
“By rolling out governance it kind of allows much more creativity and community improvement than we could develop on our own,” Leshner said.
Huobi Open-Source DeFi Blockchain Now Live For Public Beta Testing
Huobi, a major cryptocurrency exchange, announced the public testnet launch of its open-source decentralized finance (DeFi) blockchain, Huobi Chain, on Feb. 29. Its aim is to provide a regulator-friendly framework for financial services companies to deploy applications in a variety of finance-related sectors.
Huobi Chain incorporates a flexible governance model that supports both regulators and enterprises. Based on a delegated proof-of-stake consensus, it allows regulators to contribute to the network through unique regulatory nodes.
The implementation of Know Your Customer (KYC) and Anti-Money lLundering (AML) protocols is complimented by a Decentralized Identifier system to provide verifiable digital identities on the network.
For DeFi to thrive, the ecosystem requires regulators and enterprises to establish standards together, according to Huobi Group vice president of global business, Ciara Sun:
“With Huobi Chain, we want to provide the decentralized framework that facilitates industry-wide collaboration, which is critical to the widespread adoption of DeFi.”
The chain’s architecture is designed to support the high-volume transactions required by financial services, and its proprietary asset management capabilities provide support for multi-asset, cross-chain interoperability.
It has been developed to interact with a wide variety of centralized and decentralized networks, through support for user-deployed smart contracts and third-party sidechains.
The chain supports popular assets such as Bitcoin (BTC) and Ether (ETH), along with Huobi-issued assets, including Huobi Token (HT), which will act as the sole utility token on the network.
As Cointelegraph reported, decentralized finance is only now starting to realize its full potential, with many finance-related sectors adopting DeFi protocols to enhance their services.
Andre Cronje, the one-man development team behind decentralized finance (DeFi) protocol iEarn, has quit the project. Cronje cites a thankless experience with the DeFi community as the catalyst for his decision to leave.
Speaking to Cointelegraph, Cronje states that his time with iEarn was “equally the best time, and the worst.” After experiencing “absolute euphoria” during the nascent stages of the project, the developer states that the pressures began to mount once platform became successful:
“It drew the ire of a new anti-dev movement happening in defi, where devs are responsible, and even liable for user actions. The accusations, the social pressure, and pure personal insults, were too much for me to handle.”
The decentralized app (Dapp) comprises a free platform designed to identify the best investment opportunities for Ethereum (ETH) holders. The platform is permissionless, delegating investment choices to an algorithm.
DeFi Developer Quits After Six Weeks
Cronje began working on iEarn full-time from Jan. 26 onwards, contributing approximately 18 hours of work a day alongside more than $50,000 of his own money.
“My expenses to date (captured in DAI), have been approximately; ~$56,500 of which the majority has been spent on 3 audits, as this was a hard requirement from the community to even proceed with using my products.”
Andre also spent roughly 30 of his ETH on deployment expenses.
Lessons For Aspiring DeFi Developers
Cronje offers aspiring DeFI developers several words of advice, including not to attempt building “unless you have ~$100k available,” as “audits alone will cost you ~$50k.”
“Don’t try to do it alone, my biggest mistake was thinking I could do this as a solo dev. Don’t try to do it as a public good, no one cares. Don’t try to create a free service, no one will support you, give you grants, or provide you with funding. Don’t do it publicly, if you can, do it anonymously, otherwise you will be held personally liable for people’s funds (even if you don’t have access to the contracts).”
He adds that developers should “Learn how to use ganache or whiteblock” as “working on mainnet is incredibly expensive.”
Community Demands Overwhelm Small Developer
Roughly six weeks after launching iEarn, the South African coder summarized his experience with the crypto community in a Feb. 29 blog post titled “Building in #DeFi Sucks.”
Cronje recounted his lack of marketing team necessitating that he address the community’s questions and rumors at all hours of the night:
“I’m a one man team, I don’t have funding, I don’t have support, I’m not charging fees or making any revenue, I can’t do customer support 24/7, how am I suppose to operate?”
iEarn Will Continue Without Cronje
The iExec project will continue despite Cronje’s absence. Andre states that he deliberately built the project so that he could walk away from it one day:
“The protocol was designed to be 100% decentralized, no keys, no admin interaction, I have deployed the website to IPFS and integrated into as many third parties as possible […] specifically so that I could one day abandon the project. I had always designed it with that in mind. The events that transpired simply expedited my timelines.“
Andre has received contact from several development teams that wish to continue working on the project. He states that he will “advise these teams for as long as required to hand over the project.
DeFi Leader MarkerDAO Partners With Simplex To Create A Dai Fiat On-Ramp
Major decentralized finance (DeFi) player MakerDAO (MKR) partnered with payment processor Simplex to create a fiat on-ramp for its Dai (DAI) decentralized stablecoin.
According to an announcement on Mar. 3, the partnership makes it possible to buy Dai with the credit and debit cards of Simplex’s partner firms. Maker’s business development representative in Europe, Gustav Arentoft, said:
“Having Dai integrated into Simplex is a benefit to current and future users, […] it gives them a straightforward fiat on- and off-ramp with access to the industry’s biggest players.”
MakerDAO is a leading player in the DeFi space and the organization behind the Dai decentralized stablecoin based on a complex system of Ethereum-based smart contracts. As of press time, DeFi data website DeFi Pulse shows that out of the $967.4 million locked in decentralized finance applications $550 million (over 56%) is in MakerDAO’s protocol.
One Of Many Crypto Partnerships For Simplex
Simplex is a European Union-licensed financial institution with over 100 partners that support 13 different cryptocurrencies and 19 different fiat currencies. Simplex already supports Bitcoin (BTC), Binance USD (BUSD), Stellar (XLM), Litecoin (LTC), Ether (ETH), XRP, Binance Coin (BNB), Bitcoin Cash (BCH), Tron (TRX), Cosmos (ATOM), DASH and NANO.
In mid-February, cryptocurrency lending startup Celsius Network launched in-app crypto purchases through a partnership with Simplex. The firm also facilitates card payments on cryptocurrency exchanges Binance, OKCoin, KuCoin and OKEx.
A Simplex spokesperson told Cointelegraph that MakerDAO initiated the contract and that many crypto-asset teams are looking to develop an on-ramp distribution network. When asked about the expected effect of the partnership, he said:
“We have seen a dramatic effect on demand and prices with other crypto’s that’s been added to our network. Simplex is becoming a global multi currency on-ramp network.”
The spokesperson added that more cryptocurrency partnerships are coming in the future.
The Rise Of DeFi Solutions
According to DeFi Pulse, the value of the assets locked in decentralized finance applications increased by over 186% compared to one year ago.
While this growth is significant it is still worth noting that the current locked value of $967.4 million is still down over 20% from the mid-February all-time-high of over $1.2 billion.
A recent Cointelegraph analysis shows that DeFi is emerging as a possible alternative to traditional finance.
Major crypto exchange Huobi has jumped on board by announcing the public testnet launch of its open-source blockchain meant to host decentralized finance applications.
BitGo Launches Its First Institutional Crypto Lending Service
As the cryptocurrency lending industry continues to grow, another major crypto company is getting into the business.
BitGo, a crypto firm that claims to handle over 20% of all Bitcoin (BTC) transactions, is launching an institutional-level crypto lending service on March 5. The debut of BitGo’s lending feature comes after a several-month-long private beta test.
A Service Similar To Traditional Lending Business
Nick Carmi, the head of financial services at BitGo, emphasized that the new crypto lending product was developed with the goal of creating a lending business that is similar to lending services in the traditional financial markets.
The executive noted that BitGo’s lending service is part of the company’s sustainable business model:
“We are not interested in a high-volume, low-margin business; we are building deep relationships with our clients to drive value for them and to create a long term, sustainable business.”
Major features of BitGo’s lending offering include fully collateralized loans, customized and detailed reporting for each client as well as the ability to work with regulated custodian BitGo Trust, the firm announced.
BitGo’s Lending Service Supports Over 15 Currencies Including Crypto And Fiat
Nick Carmi, BitGo’s head of finance and a Wall Street veteran who joined the company in May 2019, told Cointelegraph that the new lending service marks a first for the company. The executive added that BitGo is focused on the institutional market and does not have plans to make the product available to non-institutional traders.
Carmi also noted that BitGo’s institutional lending service can support over 15 different currencies including crypto such as Bitcoin (BTC) and Ether (ETH) as well as fiat coins:
“We started our lending with BTC, and very rapidly expanded into other cryptocurrencies such as ETH, LTC, BSH, DASH, stablecoin and fiat. Bitgo’s lending services can support over 15 different coins. All of our loans are collateralized, some at above 100% and others at below depending on the coins, the term and the counterparty credit.”
According to the announcement, BitGo’s crypto lending service was built by a team of Wall Street investment specialists with a focus on institutional clients.
BitGo CEO Mike Belshe said that the company’s lending service is “melding the best” of Wall Street expertise with institutional investors and Silicon Valley’s technology and innovation.
BitGo’s move to institutional lending comes a couple of weeks after the company announced it was expanding to Europe with two cryptocurrency custody services. BitGo established two separate crypto custodies in Switzerland and Germany on Feb. 10, outlining that the two countries are among the most friendly jurisdictions for crypto business.
Crypto Lender Babel Hits $380M in Outstanding Loans
Chinese cryptocurrency lending startup Babel Finance said it has reached a record of $380 million in outstanding loans as of February.
Flex Yang, co-founder of Babel Finance, said on Thursday the firm’s outstanding loans have grown from $52 million worth of USDT as of Q1 2019 to $289 million as of the end of last year, reflecting the increasing market demand in the crypto lending business amid bitcoin’s price surge since April last year.
The firm, incorporated in Hong Kong late 2018 with a main operation in Beijing, has recently closed a Pre-A funding round with investment from Dragonfly Capital and Parallel Ventures, a crypto-focused spinoff of Chinese VC FreesFund.
Yang declined to disclose the exact investment amount but said the valuation was between $50 million to $100 million. The firm is looking to conduct another round of financing within the first half of this year with a target to raise another $10-20 million that would value itself at $100 million to $200 million.
“The purpose of the fund raise is to help us expand the network of our overseas partners since our cashflow and reserve ratio are healthy at the moment,” Yang said via a phone call.
According to him, 70 percent of the capital Babel used to originate its loans has come from crypto-interbank lenders. Among them, Yang said, the U.S.-based Genesis Capital and BlockFi are two major partners.
Meanwhile, as of Dec. 31, the firm also had about $40 million worth of USDT as outstanding loans made to other crypto lending institutions.
According to Babel’s 2019 annual report, the demand from Chinese crypto miners led to the first round of growth for the firm’s lending business as bitcoin’s price dropped below $4,000 in early 2019.
Out of the $52 million in outstanding loans Babel originated as of Q1 2019, $33.9 million-worth of USDT was lent to crypto miners, accounting for over 60 percent of the total amount.
CoinDesk reported at the time that Chinese crypto miners had turned to investment and capital firms in China to borrow digital assets to either pay for utility costs or stock up mining equipment while pledging their mined cryptocurrencies as collaterals. The strategy was not to sell their mined coins at a bearish market.
While the loans made to crypto miners have steadily gone up throughout 2019, their weight over the total outstanding amount decreased to 17 percent as of Q4 2019. Meanwhile, the demand from institutional investors and hedge funds have increased amid the crypto market’s bull run since April last year.
Yang said the loans originated for institutional traders jumped to $131 million as of Dec. 31, accounting for nearly half of the total loans outstanding at the time.
He said the firm recently launched private banking services targeting at wealthy individuals from traditional industries and has attracted over $50 million worth of USDT from about a dozen high-net-worth individuals in China.
Yields Of 25% To 42% Lure Lenders Back To DeFi Platform bZx
Lenders and depositors are coming back to bZx because the decentralized protocol for margin trading is offering significantly higher yields on ether deposits compared to its peers.
The total number of ether (ETH) locked in bZx increased to 24,711 on Thursday, having jumped by over 20 percent from 17,739 to 21,514 on Wednesday, according to data site DeFi Pulse.
The 41.7 percent rise in deposits seen over the two days could be attributed to higher rates. The yearly interest rate a user would earn by lending ether on the bZx-powered Fulcrum platform stood at 41.9 percent on March 3, as per Consensys’ Codefi data.
“Yes, our high yields are attracting lenders,” bZx founder and CEO Tom Bean told CoinDesk. “Two weeks have also passed since the attacks, so lenders have some degree of comfort in starting to use the platform again.”
Meanwhile, other platforms such as Aave and Compound were offering meagre yields of 0.06 percent and 0.01 percent, respectively. Investors, therefore, flocked to the high-yielding bZx protocol, boosting liquidity and pushing down the rate of return on lending.
The yearly interest rate has now dropped to 24.5 percent from Wednesday’s 41.9 percent, but is still offering at least 24 percentage points more than Aave and Compound. So, the number of ETH locked on bZx could continue to rise.
Why Are Rates So High On bZx?
The decentralized finance (DeFi) lending protocol was exploited in consecutive flash loan attacks in February, following which users rushed for the exits, draining liquidity and pushing rates higher.
The first attack, which took place on Valentine’s Day (Feb. 14), saw a hacker walk away with a $350,000 profit. Four days later, on Feb. 18, a hacker launched another attack on bZx and pocketed $630,000.
The total number of ethers locked in bZx dropped from roughly 27,000 to 23,000 after the first attack, while the annual interest rate spiked from 0.07 percent on Feb. 14 to 98.18 percent on Feb. 16.
With the surge in interest rates, the amount of ether held as deposits rose from 23,000 to 40,800 by Feb. 18, only to fall back to 23,000 following the second attack. The number slipped further to 17,500 at the end of February.
The annual interest rate remained in the narrow range of 40 to 42 percent in the two weeks to March 2, before falling to 25 percent on Thursday. If the deposits continue to rise, rates could soon fall back to levels seen before the Feb. 14 attack. The amount of ether in bZx is still about 20 percent lower than pre-exploit levels.
Free Market Mechanics
The DeFi space is truly decentralized where interest rates are determined by forces of demand and supply and not by a centralized authority like the U.S. Federal Reserve.
In such an environment, interest rates are purely the price for loanable funds, determined by the interaction between the supply of funds available for lending and the demand for those funds borrowed.
In bZx’s case, the annual interest rate surged as investors withdrew ether deposits, causing supply shortage. However, rates subsequently dropped with the rise in deposits and liquidity on the platform.
Noncustodial Smart Wallet Seeks To Widen Access To Crypto And DeFi
A noncustodial smart wallet for both cryptocurrencies and decentralized applications has sealed fresh funding as its attempts to challenge existing offerings in the industry.
Speaking to Cointelegraph on March 9, Itamar Lesuisse, the co-founder and CEO of the wallet’s developer, Argent, revealed that the London-based startup had raised $12 million in a Series A funding round led by the Sequoia Capital-backed fund Paradigm.
Paradigm is led by Coinbase’s co-founder Fred Ehrsam and ex-Sequoia partner Matt Huang. This week’s funding for Argent apparently represents the fund’s first investment in Europe.
The Simplicity Of Traditional Finance Apps
Lesuisse outlined that the Argent wallet aims to address concerns over security and user control, noting that “until now, crypto users have had to choose between hardware wallets, vulnerable mobile wallets or trusting a custodian.”
The wallet aims to provide the same design simplicity that challenger bank apps like Revolut or Monzo have been offering their clients. Argent has introduced daily transfer limits and large transfer approval, removed seed phrases and gas, as well as simplifying access to Dapps.
Yet, Even As It Takes On Board The Ease-Of-Use Offered By Such Banking Apps, Lesuisse Wrote:
“We don’t see the crypto offerings of Revolut or Robinhood as competitive. Argent is for controlling and using your own crypto, not just getting a little speculative exposure.”
While platforms such as Revolut — which do support cryptocurrency trading alongside fiat accounts — can “help introduce crypto to a more mainstream audience,” he said, their main use for the industry is as a bridge.
As users become more familiar with crypto, Lesuisse expects users to “migrate to non-custodial wallets that offer more control, and more use cases.”
Overall, Argent has raised $16 million since its launch in December 2017, and has seen a 330% growth in wallets with assets over the past six months.
New Interfaces For The DeFi Space
Last year, Argent integrated the MakerDAO protocol with the aim of extending its useability for the decentralized finance market and simplifying users’ ability to open MakerDAO Collateralized Debt Positions.
Collateralized Debt Positions are smart contracts integral to the Dai stablecoin system, which enable users to borrow Dai stablecoins using their Ether (ETH) as collateral.
DeFi, meanwhile, refers to any financial software based on the blockchain that focuses on digital asset or smart contract applications, such as decentralized credit and lending systems, predictions markets and asset management.
Last month, Cointelegraph reported on the latest developments in the DeFi ecosystem, including DeFi wallets such as MetaMask and Balance.
Crypto Lending Firm BlockFi Adds Support For Wire Transfers To Buy Crypto
Cryptocurrency lending platform BlockFi has added support for cash on its platform, which enables customers to purchase crypto through wire transfers.
The company revealed the new option in a press release on March 10, detailing that its users can now send wires transfers to BlockFi to buy digital currencies and earn up to 8.6% annual percentage yield. The wire transfer service is backed by financial services firm Silvergate and is available both domestically and internationally.
BlockFi founder and CEO Zac Prince told Cointelegraph that, at the moment, Bitcoin (BTC) remains the most popular cryptocurrency on the platform and is followed by Ether (ETH) and then stablecoins like USD Coin (USDC).
“We’ve found that older generations are more likely to invest in stablecoins, as they’re more risk-averse, while our Gen Z, Millennial and Gen X clients are more likely to own Bitcoin and Ethereum,” Prince further said.
Soon, BlockFi will begin adding support for additional cryptocurrencies on the platform, including more stablecoins, asset-backed coins and cryptocurrencies.
Investments And Plans For New Products
BlockFi’s funding round in late February saw the company secure $30 million. The round was led by United States-based capital fund Valar Ventures, with participation of Akuna Capital, CMT Digital, Avon Ventures, Castle Island Ventures, Purple Arch Ventures, Kenetic Capital, and Hong Kong-based HashKey Capital, among others.
At the time, BlockFi planned to allocate the raised money for expanding its offerings and hinted that it will roll out products accessible to a mainstream audience, starting with a mobile app, in the coming months.
The Crypto Loan Industry Is Growing
Recent months have been marked with a number of developments in the crypto loans industry. BitGo, a crypto firm that claims to handle over 20% of all Bitcoin transactions, announced plans to launch an institutional-level crypto lending service. The Celsius Network was reported to have more than doubled its interest payments in the three months since its last disclosure.
In the meantime, over-the-counter digital currency trading and lending firm Genesis closed the fourth quarter of 2019 with record-high results in loan originations since its inception. Genesis facilitated over $4.25 billion in loans since its incorporation in March 2018. It originated more than $1.1 billion in loans and borrows for its institutional customers, with total active loans of $545 million, showing a 23% increase compared to $450 million in Q3.
Tether Looks To Catch Up In DeFi With Aave Integration
Tether (USDT) is now available on Aave, a non-custodial lending platform formerly known as ETHLend. The top stablecoin by market capitalization appears to be signaling its move into Ethereum (ETH) decentralized finance (DeFi).
Tether shared an announcement on the development with Cointelegraph on March 10. USDT Aave’s existing offering of DAI, USDC, TUSD and sUSD stablecoins.
What Is Aave Up To?
Aave’s platform lets users borrow and lend the coins it supports at a certain interest rate. It can only be accessed with an Ethereum account, though it supports a variety of options including browser and mobile wallets.
Borrowing can be done either by putting up collateral, or by using flash loans — loans that are repaid in the same transaction where they are borrowed. The latter type does not require any collateral as the loan would not exist if not repaid.
According to Tether, Flash loans can be used to take advantage of on-chain arbitrage and liquidation opportunities, as well as moving trading positions between DeFi platforms. Like the majority of current DeFi usage, flash loans only make sense for trading cryptocurrencies.
Lending stablecoins on Aave (and many other platforms) can be quite lucrative. As of press time, the Annual Percentage Yield (APY) — an interest figure that accounts for continuous reinvestment — on DAI amounts to 25% when using a “stable” rate. USDT’s rate amounts to about 4%.
The specific figures change frequently as they depend on market dynamics. Tether reported an APY rate of more than 12% earlier on Tuesday, shortly after its launch.
The Risk Of DeFi
The interest rates offered by DeFi for lending may seem particularly lucrative when compared to other investment tools existing today. Major governments across the world are slashing interest rates to 1-2% — well below the rate of inflation — while the stock market is showing strong signs of exhaustion.
However, strong yields are generally a symptom of much higher implied risk. Recent DeFi hacks — some using flash loans — exposed major vulnerabilities in the ecosystem.
Many DeFi protocols primarily use Maker’s (MKR) DAI, a stablecoin created through a complex system of oracles and over-collateralized loans — which makes its issuance largely decentralized. Its currently high yield may be the result of higher demand within DeFi, but also a symptom of higher assumed risk.
Tether, despite a long list of controversies, has largely stood the test of time. Its lower interest rates may thus be the result of higher implicit trust in the stablecoin — though still nowhere close to that of traditional finance.
Blockchain.Com Now Offers Crypto Lending Service To All Users
Amid the ongoing growth of the cryptocurrency lending industry, major crypto wallet service Blockchain.com launches a new lending product for all users, not just institutions.
After first launching an institutional crypto lending desk in August 2019, Blockchain.com is now rolling out its crypto lending service to all users across more than 180 countries, the United Kingdom-based firm announced to Cointelegraph on March 10.
Borrow Allows Users To Borrow Paxos Standard Against Bitcoin At The Launch
The new lending product from Blockchain.com, dubbed Borrow, allows to users borrow Paxos Standard stablecoin (PAX) against Bitcoin (BTC) directly from the platform’s native cryptocurrency wallet.
At launch, Blockchain.com’s Borrow will only support PAX loans against Bitcoin, while the firm is planning to expand the platform to other assets in the near future, a spokesperson at Blockchain.com told Cointelegraph.
PAX stablecoin is one of the major United States dollar-pegged stablecoins after the largest Tether (USDT). Based on the Ethereum blockchain, Paxos Standard is backed 1:1 by the U.S. dollar and is purportedly the second most widely traded stablecoin in the crypto market after USDT.
As of press time, PAX is ranked the 33rd-largest cryptocurrency by market capitalization, which amounts to around $266 million according to data from Coin360.
Expanding Crypto Lending Service Exposure From Institutional To Retail Investors
Peter Smith, co-founder and CEO of Blockchain.com, outlined that the new development significantly expands the set of services offered to the firm’s users. Specifically, Smith emphasized that Borrow enables retail traders to trade like the “big guys,” stressing that institutional and retail investors have the same financial goals.
By offering the retail market access to the same liquidity pool as institutional investors, Blockchain.com intends to address the shortage of USD on both sides of the crypto market, the firm noted in the announcement.
The Blockchain.com CEO said:
“Institutional and retail investors have the same financial goals — grow wealth and manage risks — but the tools at their disposal are vastly different […] Now, with our suite of trading products and Borrow, retail users can trade like the big guys without selling the crypto they’ve stockpiled or leaving their Wallet.”
Growth Of The Crypto Lending Industry
Since the launch of Blockchain.com’s institutional lending platform in August 2019, the firm had loaned more than $120 million as of November, significantly increasing loans from $10 million in the first month.
Blockchain.com’s new lending product Borrow comes amid a rise in crypto companies launching crypto loan services. On March 5, major Bitcoin payment firm BitGo officially launched its institutional-level crypto lending service. As reported by Cointelegrpaph, BitGo doesn’t plan to roll out the service to non-institutional clients in the near future though.
Previously, cryptocurrency lending startup Celsius Network saw its interest payments more than double in the three months since November 2019.
Previously Crypto-Only BlockFi Adds Cash On-Ramp Through Silvergate Partnership
BlockFi, a financial company focused on cryptocurrencies, says it has enabled a new feature that will let customers use cash to buy bitcoin.
Previously, the Jersey City, N.J.-based crypto lender only allowed customers to bring digital assets onto its platform, such as stablecoins linked to the U.S. dollar, Chief Executive Zac Prince said in a phone interview. The system relied solely on “crypto payment rails,” he said.
Starting Tuesday, customers can send cash to BlockFi via wire transfers through a partnership with Silvergate Capital, a bank holding company based in La Jolla, Calif. The publicly traded Silvergate is one of the few commercial lenders willing to do business with cryptocurrency-focused companies.
The cash transfers can also be used to deposit money with BlockFi and earn interest, currently set at an 8.6 percent annual rate – some 860 times higher than the 0.01 percent rate offered on a JPMorgan Chase bank account. Unlike Chase, BlockFi isn’t a bank, however, so the accounts don’t come with federal deposit insurance protection. But also unlike Chase, BlockFi lets customers choose an option that lets them get the interest paid in bitcoin (BTC).
“In an increasingly low-yield and volatile market, opportunities like earning 8.6 percent on stablecoin deposits with BlockFi stands out in the crypto sector,” Prince said in a statement. “Adding support for inbound wires will facilitate increased liquidity on BlockFi’s platform, which flows through and improves liquidity in the broader crypto ecosystem.”
More individual investors are becoming interested in cryptocurrencies, especially following the recent outperformance of bitcoin compared with U.S. stocks. Fears related to the economic impact of the spreading coronavirus have sent the S&P 500 Index of large U.S. stocks down 15 percent on a year-to-date basis. Bitcoin, by contrast, is up 13 percent in 2020.
Prince said BlockFi started developing the wire-transfer capability after being inundated by “requests every day from our existing clients, and also from folks who aren’t already cryptocurrency owners.”
BlockFi, founded in 2017, announced in February it had raised $30 million in fresh funding from investors including Valar Ventures, Morgan Creek Digital and Winklevoss Capital. The closely held company disclosed last month it had $650 million of assets on its platform, including cryptocurrency-backed loans, and that revenue surged 20-fold in 2019.
The company said in Tuesday’s statement it recently obtained a money-services business license from the state of Florida, allowing residents of the state to use BlockFi’s trading service and interest accounts.
Federal Reserve Injects $168B, Greater Than Entire BTC Market Cap
After several days of plunging markets, the U.S. Federal Reserve added $168 billion into the economy — a total higher than all money currently invested in Bitcoin.
“Separate auctions Tuesday in the short-term lending market, or repo, saw a two-week offering massively oversubscribed, with $93 billion offered for a $45 billion operation,” according to a March 10 CNBC news brief: “An overnight offering saw the New York Fed’s trading desk fill $123.625 billion in bids.”
Essentially, the U.S. Federal Reserve has put more cash into play in the economy.
Bitcoin’s Current Market Cap Holds Less Capital
Bitcoin’s current market cap comprises just shy of $145 billion at press time, according to CoinMarketCap data.
For reference, the U.S. government just dealt approximately $23 billion more cash than all the money held in Bitcoin. Taking its status as a global asset into account, one might argue that Bitcoin may still be a bit player in the finance game.
The Fed Flies Into Action Amid Market Uncertainty
Traditional markets have faced significant downward price action lately as fears of coronavirus and price battles surrounding oil continue to rage.
Oil fell over 20% in a single bound on March 9 — it was the commodity’s largest tumble since 1991. Meanwhile, the Dow Jones Industrial Average dropped 7.8% on the same day.
The Fed’s March 10 capital injection seems to have put life back into mainstream markets, as the Dow rallied 4.9% the following day.
Bitcoin, on the other hand, did not see the same rebound. The largest cryptocurrency is sitting at a 1.39% increase over the last 24 hours.
Blockchain Lender Reports 300% Surge As Fed Slashes Interest Rates
A blockchain lending firm has seen the value of total loans funded surge to $1 billion since the United States Federal Reserve announced its emergency stimulus interest rate cut last week.
In an announcement on March 10, Figure Technologies — which claims to be the industry’s first fintech to bring lending to the blockchain — said loan applications with the firm had soared by 300% since the Fed’s action.
Unprecedented Low Interest Rates
Since its launch in 2018, Figure Technologies has used its blockchain, Provenance, to process consumer loans; one year on, the firm claims it was originating $85 million of loans per month for itself and other major lenders.
In December 2019, it went on to seal over $100 million in a Series C funding round led by Morgan Creek Digital, with participation from Mitsubishi UFJ Financial Group’s venture capital arm, MUFG Innovation Partners.
Among its blockchain-based lending solutions, Figure Technologies issues 5-minute home equity lines of credit (HELOCs), in which the borrower uses his or her house as collateral for the loan.
Mike Cagney, the firm’s co-founder and CEO, says the platform being built on the Provenance blockchain was crucial to support the growth and innovation of such lending products. As central banks worldwide move to lower rates in a bid to offset the economic impact of coronavirus, Cagney said:
“The 300 percent increase in applications suggests consumers are eager to take advantage of unprecedented lower rates across mortgages, HELOCs and student loan refinancing.”
The firm has indicated that the average size of loans issued in the recent lending surge was roughly $50,000 per household.
Cagney has said that new blockchain-based solutions will be rolled out tied to these lower rates “in the near future.”
As reported earlier today, the Bank of England (BoE) has cut interest rates by 0.5% — the most since 2009 — in direct response to economic pressure posed by the coronavirus outbreak.
With traditional markets floundering amid the health crisis, Bitcoin (BTC) too has faced losses. One commentator, the creator of Bollinger Bands trading indicator, John Bollinger, remarked:
“Bitcoin fell victim to the COVID-19 panic. I truly did not see that coming, I thought it might act as a safe haven asset.”
Safe-haven status, he added, remains “entirely psychological” — “a matter of perception, not fact.”
DeFi Project Backed by Polychain and DragonFly Capital Shuts Down
Decentralized finance project Paradigm Labs — backed by veteran crypto investors Polychain Capital, Dragonfly Capital, and Chapter One Ventures — is shutting down.
In an announcement yesterday, March 10, CEO and co-founder Liam Kovatch said the closure was due to Paradigm’s “failure to carve a viable niche in the DEX [decentralized exchange] marketplace” and to factors both “within and outside” of the team’s control.
Out Of Step With A Fast-Evolving DeFi Landscape
Founded in 2018, Paradigm Labs raised an undisclosed amount in seed funding for the development of a product dubbed Kosu — a liquidity aggregation protocol for DEXs.
In the span of these past two years, Kovatch wrote, the DEX landscape has “evolved considerably,” with the result that many of Paradigm’s early efforts and investment in Kosu were “made obsolete” by changes in DEX market structure:
“We’ve been able to observe significant developments such as the launch of Uniswap, the establishment of the decentralized finance (DeFi) movement and more. While exciting and positive for the community at large, these developments have made the DEX space incredibly fluid, and challenging for an organization like ours to navigate.”
Kovatch revealed that Paradigm Labs began to doubt Kosu’s viability in the rapidly changing DEX ecosystem by early to mid-2019, due not only to Uniswap’s popularity but also to early developments on the DEX protocol 0x (ZRX).
Amid an increasingly “crowded liquidity protocol/networking ecosystem,” Kovatch noted, the team designed a new product — a non-custodial request for quotation system dubbed Zaidan, built on 0x. This idea, however:
“Came to us late in the company’s life cycle at which point we were under-resourced to fully develop Zaidan […] were quite hesitant to pivot completely away from Kosu due to the investment we had made in the project. In retrospect, this hesitation was a mistake. ”
Overall, Kovatch attributes Paradigm Labs’ failure to being “a bit too early” an entrant into the DeFi space, and the project has now found itself unable to secure the necessary funding to develop Zaidan into a live trading system.
Breaking Down The Acronyms
DEXs — or non-custodial, decentralized crypto exchanges — enable users to trade peer-to-peer, using smart contracts to automate deal matching and asset liquidation in order to allow users’ funds to remain under their control. Their sluggish adoption has to date broadly been attributed to their low liquidity rates relative to established centralized counterparts.
Meanwhile, DeFi is used to designate the decentralized finance market — or the use of blockchain, digital assets and smart contracts for financial services such as credit and lending.
DeFi In 2020
In early February, locked-up assets in the DeFi market — i.e. across its spectrum of smart contracts, protocols and decentralized applications — hit a milestone $1 billion in value. This represented a fourfold increase year-on-year.
Later that month, however, the sector saw a setback, falling by $140 million from its peak of $1.2 billion on Feb. 18. This followed a series of back-to-back “flash loan” attacks on the decentralized lending protocol bZx.
DeFi Giant MakerDAO Avoiding Shutdown In The Face of Tanking ETH — For Now
As Ether’s price sees record losses, MakerDAO, the biggest player in decentralized finance (DeFi) on the Ethereum network, is looking at responses including a shutdown — though that possibility remains unlikely at this point.
Markets Clobber DeFi
Per a March 12 call in response to “Black Thursday” losses, developers and MakerDAO Foundation members weighed the damage that the drop in Ether’s price had done to MakerDAO’s lending protocol.
MakerDAO lends DAI for collateral in the form of Ether. As the market for ETH drops, MakerDAO’s protocol automatically sells. The recent market saw losses too dramatic for the protocol’s auctions to keep up with.
Total Shutdown Still Unlikely
For now, stakeholders are understandably eager to avoid disabling the protocol. As Ethereum developer Ryan Berckmans wrote in response to the call:
“An emergency shutdown (not happening now) would cause DAI holders to take a haircut, whereas the social contract of MakerDAO is that MKR tokens take a haircut in the event of system failure. Therefore we should try and ensure that MKR holders take a hair cut by avoiding emergency shutdown if possible. I heard that emergency shutdown is not being considered as an immediate option.”
As developer LongForWisdom said on the call, the shutdown is currently a remote prospect, but may become the most rational decision if ETH falls to $80 or so: “If Ether price drops another 30, 40%, then we might be looking at that.”
Cointelegraph reached out to the MakerDAO Foundation for comment but had received no response as of press time. This article will be updated to include comments as they come in.
Over the 24 hours up to press time, Ether had peaked at just over $195, only to fall to $128 as of 13:45 UTC.
ETH’s drop is just part of a wider sea of red facing crypto and traditional markets on March 12.
So many people were trying to use the Ethereum blockchain during Thursday’s market meltdown that many applications simply stopped working as intended.
The decentralized finance (DeFi) sector was hit particularly hard.
The decentralized services that feed price information into these headless lending platforms – known as “oracles” in the industry – simply couldn’t keep up.
Oracles could not send accurate price data and traders could not execute trades without paying horrendous fees to record transactions onto the blockchain.
In a throwback to 2017, the Ethereum network became too crowded to execute transactions for many projects. In 2017, it was NFT gaming app CryptoKitties that overloaded Ethereum by issuing too many transactions during a bull market. At one point, 30,000 transactions were stuck in the queue waiting to be processed by the network.
Thursday’s mass transaction action was caused by the precarious plummet of ether’s price, which shed 30 percent in 24 hours in a network first.
Pricing oracles – typically Chainlink or Maker’s V2 oracle – were the main victims Thursday.
Several of Chainlink’s 21 oracles were down during prime trading hours, according to bZx co-founder and CEO Tom Bean.
Stani Kulechov, founder and CEO of DeFi platform Aave, said he saw a Maker oracle throw a “20 percent price deviation” between the actual market price and Maker’s generated feed.
Oracles query data from on- or off-chain sources. Contracts pulling from on-chain sources had their requests crowded out by other transactions on the ethereum network, leading to oracle failures for both V2 and Chainlink.
Orders were also backlogged on the Ethereum mainnet and traders were forced to pay outlandish gas fees to settle.
For example, users were not able to perform trades on exchange dYdX or lending platform Nuo Network. Both DeFi platforms changed their fee structures (including dYdX multiple times) to execute a slew of backlogged trades Thursday and early Friday.
“The network condition is affecting everyone,” Aave’s Kulechov said. “People need to just pay the 160 gwei [gas fee] to keep prices up to date.”
MakerDAO was undoubtedly the biggest loser on Thursday. An infrastructure error led to over $4 million being swooped up by a lurking bot-maker, leaving investors high and dry as their collateral was taken away. In response, the Maker community voted Friday to restructure certain risk measures.
DeFi exchange bZx also halted opening new trades and loans and will leave these features offline until an audit is conducted, said Bean. bZx recently switched to Chainlink following a flash loan attack that relied on manipulated pricing data. All Chainlink oracles are reporting as of press time.
“The issue is that data providers can’t provide timely updates. I can query the current rate, but it’s way off from [the] actual market rate,” Bean said.
In an email, Chainlink co-founder Sergey Nazarov told CoinDesk that “unique market conditions created temporary congestion” on the ethereum mainnet. He said the congestion has been reduced, and all Chainlink oracles, which pull from multiple pricing feeds themselves, are now reporting accurately.
Still, other DeFi applications handled the surge of transactions without heavy-handed measures.
Decentralized exchange Uniswap saw its all-time trade volume double to over $53 million, according to a tweet from Uniswap founder Hayden Adams.
Kyber Network also set an all time high with some $30 million in 24-hour trade volume, according to CoinGecko.
What does this all mean? DeFi didn’t die, but it didn’t thrive either.
“If we want crypto to become a global asset class, we need better DeFi [infrastructure],” Multicoin Capital managing partner Kyle Samani tweeted Friday. “The status quo is not sufficient by orders of magnitude.”
MakerDAO Debts Grow As DeFi Leader Moves To Stabilize Protocol
MakerDAO’s emergency shutdown option – which was weighed by community members following the appearance of a $4 million debt bubble on the decentralized finance (DeFi) platform – will not pass at this time. If a shutdown was triggered by the Maker team, all dai stablecoins in circulation would convert to the underlying asset, ether (ETH).
A flaw in Maker’s system for generating collateralized debt positions (CDPs) caused some $4 million in ether to be swiped up for free. This was caused by network congestion on the Ethereum network and Maker’s pricing oracles failing to update quickly enough.
The amount of debt on the Maker platform continues to rise, however, hitting nearly $5.7 million as of press time Friday.
This is likely caused by high chain congestion on Ethereum and the inability to add collateral to positions on Maker. Gas prices on the Ethereum mainnet continued to increase in the early UTC hours Friday, with prices hitting 200 Gwei, according to data site Eth Gas Station.
In an executive vote Friday, the Maker team is expected to address three pressing issues following Thursday’s turmoil: the dai peg, system debt and debt auctions. The 12 listed proposals MKR holders voted on were intended to normalize the platform’s operations.
Regardless of chain congestion, people with dai loans have poured ETH into the Maker protocol to shore up positions that could be undercollateralized if another drop in ETH’s value were to hit.
Those not able to get collateral into the system to cover their loans were forcefully liquidated by the protocol, however.
In an earlier vote Friday, the MakerDAO community voted to adjust the system’s risk parameters. Though the move comes in the wake of a dramatic 30 percent drop in ETH’s price, the changes were first discussed during a March 5 governance call.
The voting ballot was first issued Friday at 4:30 UTC and passed three hours later, according to the Maker Foundation. The vote can be executed 24 hours after passage, or 7:30 UTC on March 14.
The ballot’s content includes measures to increase the supply of dai on the market, which experienced a squeeze given market demand. Indeed, the demand for dai was reflected in the stablecoin’s interest rate reaching 22 percent Thursday on the second-largest DeFi platform, Compound.
Maker will also print new MKR governance tokens to refund CDPs that lost funds Thursday with the stated goal of returning dai to its dollar peg, according to a Maker Foundation blog post.
DeFi entrepreneur Ryan Berckmans described the action as a “haircut” for MKR holders in the spirit of the DeFi platform’s white paper.
“During a Debt Auction, MKR is minted by the system (increasing the amount of MKR in circulation), and then sold to bidders for Dai,” the white paper states.
Both investment firm Paradigm and venture-backed DeFi startup Dharma have announced intentions to help Maker through the debt crisis by purchasing the newly printed MKR.
“MKR buyers should prepare for sustained high gas prices, and downward pressure on ETH and MKR,” Berckmans said in a summary of the March 12 call. “We should plan for global markets to potentially crash further, which may correlate with further crypto drops.”
Overall, MakerDAO stakeholders are now focused on returning dai to its 1:1 peg with the U.S. dollar after investors rushed to the stablecoin as a safe haven.
The stablecoin shot as high as $1.22 per token yesterday and has since fallen to $0.98, according to CoinGecko. Data providers CoinMarketCap, CoinGecko and Messari all show dai’s price hitting an all-time high Thursday.
The peg was last discussed in the March 5 governance call.
“Major swings in ETH price are what is going to determine a lot of what happens with migration and with dai price,” Maker community member Vishesh said during the March 5 call.
$100M+ In Margin Calls: Crypto Lenders Demand Collateral As Market Buckles
The budding market for cryptocurrency-backed loans met its first big stress test this week as bitcoin (BTC) dropped 40 percent and lenders demanded additional collateral from borrowers.
In the last day, Genesis Capital called an additional $100 million of collateral from its selective pool of about 40 clients, CEO Michael Moro said Friday afternoon. Rival Celsius Network–which lends to 225 institutions, making up up a loan book of $400 million to $600 million at any given time–has seen margin calls in the hundreds of millions, according to CEO Alex Mashinsky.
Meanwhile, Nexo’s co-founder Antoni Trenchev said some customers have repaid loans while it has liquidated other clients’ collateral, the equivalent of foreclosing on a home mortgage. And BlockFi reported in a blog post that it made margin calls on its dollar-denominated loan book, with some liquidations, but declined to comment further.
“As of five minutes ago, everyone who needed to post collateral has,” Moro said. “We’ve had zero liquidation events … What we have done to augment our lending is we have not made any additional loans in the last few days.”
In the past year, crypto lending activity has mushroomed, as some holders sought to earn a yield on their assets, others sought to raise cash without selling their coins and market makers borrowed to fill orders quickly. The phenomenon could potentially improve liquidity and price discovery for crypto assets but it also has introduced systemic risks.
Wait And See
Now, Genesis doesn’t plan to make any loans that are collateralized less than 100 percent until the market calms down, Moro said.
While Genesis is still trying to figure out what interest rates should look like in the volatile environment, the unit of Digital Currency Group is raising collateral requirements on loans from around 105 percent to between 110 and 120 percent for loans backed by bitcoin, which make up the majority of its loan book. If volatility doesn’t subside, collateral levels could rise further, to anywhere between 130 and 150 percent, as underwriting standards continue to tighten.
As the market dropped, Moro said demand shifted from fiat loans to bitcoin loans as traders looked to arbitrage the difference between bitcoin’s spot and futures prices. At sister company Genesis Trading, Moro said, only about 60 percent of clients were selling while 40 percent were still buying.
Given the turmoil, “I would have expected it to be 80/20 or 90/10,” he said.
‘Best Day Ever’
Celsius also raised collateral standards after Thursday’s rout, but Mashinsky claimed it was the “best day ever” for the company as it “loaned more than ever and charged the most interest” than it ever has.
For example, loans on ether now carry an eye-popping interest rate of around 260 percent compared to 15 to 20 percent under normal circumstances and 4 or 5 percent in the calmest of times, Mashinsky said.
As Celsius grows, however, it plans to tighten the limits on credit lines it offers, Mashinsky said.
Nexo is holding the launch of a product that would allow users to earn interest on their crypto, Trenchev said. (The company only offers crypto-collateralized fiat loans and interest on fiat and stablecoins).
“We were going to launch two weeks from now,” Trenchev said. “But we have to wait for this to play out, before we feel confident to launch.”
Trenchev said he’s confident that demand for fiat loans will hold steady as bitcoin seems to have bottomed around $3,867 and he does not plan to change interest rates. Nexo’s loans are typically collateralized between 200 and 500 percent, he added.
“The beauty of collateralized loans is you don’t have to worry about the underwriting process that much,” Trenchev said. “I would argue that digital assets are the best collateral–better than a penthouse on Fifth Avenue. You might have a steady price situation, but with digital assets you have instant liquidity.”
Celsius Network Is Profitable And Resisting Market Downturn, Claims CEO
The Celsius Network is the first major cryptocurrency lending platform that is profitable, according to its CEO and founder Alex Mashinsky.
Cointelegraph interviewed Mashinsky to learn more about this achievement, how the latest market downturn has affected its business and his outlook on the industry.
According to Mashinsky, the company was profitable in 2019 on a net income basis and in 2020 on a free cash flow basis. In March, Celsius Network is expected to post record revenues of over $2 million.
Mashinsky explains that his company’s balance sheets are much more solid than of his competitors, “about 90% of the deposits come from the retail clients, while close to 100% of the borrowers are institutions.” Citing the recent issue that BitMEX and MakerDAO faced during the most recent market retraction, Mashinksky noted:
“BitMEX had to liquidate 90% of their clients, even though they were still making money. We didn’t have a single [institutional] liquidation. They lend to retail speculators, while we lend to institutions. We proved on the worst day that our model works better than MakerDAO, better than DeFi, better than the Fed.”
The increased market volatility is a double-edged sword for the company, Mashinsky admitted. On one hand, it can charge higher rates, on the other, “new people are not coming.”
“Coinbase Can’t Compete With Us”
Mashinsky Believes That, Sooner Or Later, Most Of The Crypto Assets Will Migrate Off Exchanges:
“Coinbase can’t afford to pay everyone 4–5 % interest, they’ll have to come up with a new business model. They won’t be able to live off of trading fees forever. They’re just another ‘Wall Street’ firm, they charge fees, they don’t create value for the users.”
He further stated that all the “off-shore” exchanges will “self-destroy,” and smart ones will move to the regulated jurisdictions — “that’s what Binance is doing.”
Despite the latest turmoil in the crypto markets, Mashinsky remains optimistic about his company as an alternative to the traditional financial system:
“With Celsius, I wanted to create an alternative to Wall Street, something separate. Banks charge you 24% interest on your credit cards, but they pay you nothing. I knew, if I created a blockchain lending platform, where most of the revenue goes back to the people, eventually, all the money from the banks will flow to Celsius.”
For a crypto startup to achieve profitability in less than 24 months is an impressive achievement. It also shows that a crypto business model based on creating value for the community works.
Billionaire Tim Draper Sees Potential In DeFi And Backs New DAO
Tim Draper, the billionaire and Bitcoin bull who has backed Tesla, SpaceX and Coinbase, is making moves into decentralized finance. He is now investing in DeFi Money Markets DAO (DMM DAO), according to the DMM Foundation’s official announcement on March 16.
Celsius Partners With Chainlink To Decentralize Price Data
Today, March 30, Celsius Network (CEL) begins using Chainlink’s (LINK) price data feed oracles while offering treasury management services to the oracle platform.
The CEO and founder of Celsius, Alex Mashinsky, told Cointelegraph about the rationale behind the partnership:
“Celsius wants to be more transparent and more decentralized and that is the main driver for partnering with Chainlink.”
The partnership will begin with Celsius using Chailink’s crypto price oracles, after which Celsius will move transactions on-chain for greater transparency.
Celsius will provide treasury service to Chainlink, managing “several million dollars” worth of cryptocurrency. Mashinky stated that his company is paying out weekly interest on their deposits to the partner while Chainlink is able “to borrow dollars when they need them so they do not have to sell coins”.
Chainlink’s CEO Sergey Nazarov told Cointelegraph that the partnership is important to him personally, as it proves that incremental decentralization works:
“I think many teams could benefit from reexamining an incremental/gradual approach to decentralizing their financial product/application, people might think decentralization is a binary decision, because that’s what it looked like when they started building their application. They might think “either I go fully decentralized or fully centralized”, they don’t always consider a middle path where they can gradually decentralize their application.”
According to Mashinsky, not a single institutional client of Celsius defaulted during the recent market meltdown. Perhaps, further decentralization of its technological stack will make the company even more robust.
Celsius Lowers Loan Minimum And Introduces Gold On Gold Interest
The Celsius Network is lowering its minimum loan request to $1,000 and will introduce interest paid out in gold.
Celsius founder and CEO Alex Mashinsky told Cointelegraph that they had previously lowered the minimum to $1,500 from $3,000, and now they decided to lower it again to $1,000 to “let users borrow smaller amounts without having to sell their crypto”. However, borrowers still need to post the collateral that is twice the loan amount.
Discussing The Difference Between Celsius’ Business Model And The Traditional Banking World, Mashinsky Observed:
“We do the same thing as the banks, the main difference is that we give 80% back to the users while the banks keep 99%. Because we don’t have to pay dividends to the shareholders.”
Mashinsky stated that in terms of volume, Celsius’ portfolio is dominated by larger borrowers, with several loans exceeding $10 million. However, in terms of the sheer numbers, smaller loans make up the bulk of the loan portfolio.
Gold On Gold Interest
In May, Celsius will introduce two tokens backed with gold to its ecosystem, Tether Gold (XAUT) and CoinShares’ (DGLD). Users that deposit those tokens will earn interest in gold. Mashinsky told Cointelegraph:
“This is revolutionary, typically, with the gold you have negative yields, you have to pay the bank or another custodian for the privilege of ownership. With Celsius, not only you’ll benefit from the gold’s upside, but you’ll be earning interest in gold.”
US government Is Afraid Of “Tough Solutions”
Mashinsky also discussed the way the United States government and Federal Reserve are handling the economic crisis induced by the coronavirus pandemic. He stated that the current crop of politicians is unwilling to implement the painful solutions that are nonetheless necessary:
“The economists and the politicians believe they have figured out how to smooth out the economic cycle, how to prevent recessions. They just print more money, this is their solution to every problem. All the growth that we have had since 2008, it’s all a bubble. All the growth is achieved by Americans borrowing money and spending it on the service economy. But the real growth doesn’t come from spending. Politicians, nowadays, don’t want to make tough decisions. It’s not how this country was built.”
The Billionaire Is Investing In Governance Tokens
Draper Goren Holm Ventures, the leading fintech VC fund focusing on early-stage blockchain startups, has purchased a stake in the form of DMG — the soon-to-be-released governance token that will run the DMM DAO, as stated in the announcement.
According to the official post, The DMG token offers holders the right to vote and direct the system that bridges the gap between real-world assets and the new on-chain economy.
Blockchain Technology Supports DeFin Protocols
The DMM Protocol is a bridge between Ethereum digital assets and real-world assets, according to the official post. The DMM Protocol is an interface that also allows anyone to earn 6.25% backed by real-world assets by visiting the blockchain backed DeFi Money Market App, according to the announcement.
DMM launched the DeFi Money Market using Chainlink’s secure oracles to validate and make viewable the asset backing on-chain.
Sergey Nazarov, Co-Founder Of Chainlink, Commented On The DMM Protocol Saying:
“Adding real-world assets as collateral for blockchain-based money markets has the potential to create consistent, stable yields in a decentralized, permissionless manner.”
The aim of the protocol is to leverage blockchain to solve a global problem of how to earn passive income while providing transparency to the underlying asset. Tim Draper added that:
“Many crypto and traditional investors are looking for stable, secure passive income. Gregory Keough and the team at the DMM Foundation leverage blockchain to allow users to earn passive income.”
Defi Continues To Trend
Last month, Cointelegraph reported on the latest development of DeFi. It pointed out that DeFi is emerging as an alternative solution for the traditional financial sector in the near future.
DeFi applications continue to show potential in decentralized credit and lending systems, prediction markets and asset management, says the report.
Crypto Lending Firm BlockFi Raising Interest Rates On BTC And ETH
Clients of one crypto lending company may soon notice some changes in response to the recent drops in the market.
Starting on April 1, BlockFi will be raising the interest account rates on Bitcoin (BTC) and Ether (ETH).
According to CEO Zac Prince, BlockFi users holding between 0-5 BTC now will earn a 6% annual percentage yield (APY), while those with up to 500 ETH will earn a 4.5% APY. Stablecoins like the Gemini Dollar (GUSD) and USD Coin (USDC), will retain their 8.6% APY interest rates.
Why Are The Interest Rates Changing Now?
With the recent Bitcoin crash caused by the coronavirus restrictions affecting markets, BlockFi has reported “very limited liquidity”. The lending firm said “they did not liquidate USD loan client collateral below a price of ~$4,500, despite the market reaching lows of ~$3,800.”
Therefore the decision to raise interest rates is unexpected when considering how traditional financial institutions are reacting to these changes in the market. Even the U.S. Federal Reserve has cut interest rates to 0%.
Reason For Optimism In The Current Market
Nevertheless, Prince sees hope in the crypto market, citing that BlockFi itself has maintained “perfect performance” with “zero losses” reported.
“Our balance sheet is stronger than ever and shifts in the institutional lending markets have created opportunities that expand our margin.”
The CEO went on to describe how BlockFi has processed the largest number and volume of daily deposits and withdrawals in the platform’s history. Tens of millions in trading volume have continued without interruption as a result of the BlockFi team’s efforts.
“As the global economy weathers a number of headwinds, including the coronavirus pandemic, rest assured that at BlockFi we will remain a stable source of liquidity, while continuing to provide best-in-class wealth management solutions for our clients and the broader cryptocurrency market.”
Notable Investors Behind The Crypto Lending Firm
BlockFi raised $30 million in a Series B funding round in February. Major investors included Morgan Creek Digital, Winklevoss Capital and Arrington XRP Capital.
This brings BlockFi’s total funds raised to more than $100 million since it was founded in 2018. The platform currently boasts more than $650 million in digital assets.
$2 Million Of MakerDAO Debt To Be Wiped As Auction Reaches Final Stages
Bidders have already committed to buying Maker (MKR) tokens for a total of $2 million in Dai (DAI) as the first phase of the MakerDAO debt auction reaches its final stages.
The majority of the current winning bids were placed at around 1:25 a.m. EST, March 20, so unless further bids come in, most of the lots will be sold at around 7:25 a.m. EST.
In the first phase of the debt auction, 40 individual lots, valued at 50,000 DAI each, were released and have received bids, meaning that a total of $2 million will be wiped off the debt of $4 million incurred as a result of last week’s Ether (ETH) market instability.
As Cointelegraph reported yesterday, the format is that of a reverse auction, whereby bidders commit to buying ever-decreasing amounts of MKR for their 50,000 DAI bids.
The starting bid on each lot was for 250 MKR, with a minimum decrease of 3% for each subsequent bid.
At the time the first lot was released, the MKR price stood at around $245, meaning that $50,000 worth of DAI was being bid for $61,250 worth of Maker tokens. However, as bids for lower amounts of MKR came in, its price started to rise.
The currently winning bids on the majority of lots were placed for 188.6792 MKR, when the price was $270.02, representing $50,947.16. A further 3% drop on the amount of MKR being bid for would take the value down to $49,418.74, or less than the Dai being bid.
At around 6:00 a.m. EST, the MKR price hit $305, which saw fresh bids on seven of the lots, taking them down to 183.1837 MKR.
At $305 per Maker token, bids could go as low as 164 MKR and still be making a profit.
Bidding on each lot will close either 6 hours after the last bid, or 72 hours after the first, whichever is sooner. Therefore, the lots which have received fresh bids will end later than the others.
Further gains in MKR price could encourage additional bids on more of the lots, as fresh bidders enter the auction. Prior to the price spike this morning, all 40 of the lots were evenly divided between three participants, but all of the new bids are from different addresses.
However, as things stand, the majority of lots are set to end very shortly, in what can be seen as a successful debt-reducing mechanism as part of the MakerDAO Protocol.
The second wave of lots is expected to become available on March 22.
Coinbase Pumps $1.1M USDC Into DeFi Sites Uniswap And PoolTogether
Coinbase is putting its digital dollars where the traction is.
Announced Wednesday, Coinbase has deposited $1.1 million in USDC stablecoins into the pools powering two of the most popular decentralized finance (DeFi) applications on Ethereum: Uniswap and PoolTogether. The investment comes via the USDC Bootstrap Fund, which the company launched in September 2019.
“With USDC, we hope to provide critical infrastructure that will enable DeFi to grow and increasingly compete with existing financial products,” Coinbase wrote in a blog post shared with CoinDesk in advance.
Uniswap is an automated market maker and PoolTogether gamifies the saving of money. DeFi platforms Compound and dYdX were the Bootstrap Fund’s initial investments.
The latest move by Coinbase is a vote of confidence in DeFi at a time when the sector could certainly use it. In February, there was $1 billion worth of ether (ETH) locked in various DeFi applications, but that’s down to $629 million as of this writing, according to DeFi Pulse. The sector’s leading platform, MakerDAO, suffered a major crisis earlier this month when coronavirus fears crashed crypto markets (though the DeFi leader has since bounced back).
As for the Coinbase funding for Uniswap and PoolTogether, it’s worth noting these aren’t so much investments in either company but deposits into the underlying liquidity pools that make them work.
Coinbase is putting $1 million into the liquidity pool for USDC/ETH on Uniswap. When the pools are bigger, the app works better.
“It provides a significant improvement to prices on that pool. The pool can support larger trade sizes and more volume,” Hayden Adams, founder of Uniswap, told CoinDesk in an email.
Uniswap works by setting up matched pools where an ERC-20 token is paired with an equal amount of value in ETH. Users trade one token for ETH and that ETH for the other token, with the user never touching the ETH in the middle.
Increasing the amount of funds in each pool expands the bandwidth of any given ERC-20 token.
Smaller pools are easier to get out of line with the broader market. Larger pools are much less likely to, which means other apps will integrate it and “a larger percentage of these price-sensitive trades are more likely to be executed over Uniswap compared with other liquidity sources,” Adams wrote.
“Uniswap is extensively used for liquidations and arbitrage in DeFi, and liquid exchanges are a critical building block to decentralized finance, ” Nemil Dalal, of Coinbase, told CoinDesk in an email.
Coinbase has contributed $100,000 to the sponsored pool backing PoolTogether’s USDC daily prize.
PoolTogether is pretty counterintuitive so here’s a quick recap. It’s a lossless lottery. People get their lottery tickets by depositing DAI or USDC. Those tokens go into Compound, where they earn interest. Each week or each day (depending on the token), one depositor wins all the interest earned by everyone’s crypto over that period.
No one ever loses their principle, and that’s the appeal (if you can stomach the opportunity cost). People can withdraw their tokens at any time and all they will lose is their shot at winning the next pool.
PoolTogether sweetens the deal with “sponsored pools,” where funds go into the pot without the possibility of winning the prize.
“We do see a lot of players – especially larger ones – tracking the sponsorship,” founder Leighton Cusack told CoinDesk. “Since a significant portion of the prize pool is sponsored it makes a pretty big impact on the expected value and return players see.”
PoolTogether could use a boost. The daily prize in USDC is down from $45 in early March to $2 as of yesterday. That said, the whole DeFi sector is down dramatically and deposits of USDC on Compound are paying about 0.46 percent right now.
Bitfinex Launches Staking In Response To Customer Demand
Major cryptocurrency exchange Bitfinex has become the latest exchange to offer staking services to customers.
Announced April 3, Bitfinex will offer staking rewards up to 10% per annum on crypto assets underpinned by a Proof-of-Stake algorithm.
“We’re committed to engaging our existing users and the wider community with new products and innovations,” said Bitfinex’s CTO, Paolo Ardoino. “The Bitfinex Staking Rewards Program provides our users with another avenue to increase their holdings on our platform.”
Bitfinex Introduces Staking In Response To Customer Demand
Ardoino states that Bitfinex’s clients asked for staking to be introduced, noting that staking allows traders to generate passive income by holding crypto assets on the exchange.
Bitfinex will launch staking with support for three cryptocurrencies: EOS, V-Systems (VSYS), and Cosmos (ATOM). The exchange’s CTO adds that more stackable tokens will be added in the coming months — with Tezos (XTZ) staking currently slated to launch in May.
Ardoino also revealed that Bitfinex will be launching new products “related to P2P margin trading and lending” and derivatives in the near future.
To promote its staking service, Bitfinex is offering a competition in which participants can win branded Bitfinex apparel.
Crypto Exchanges Compete For Passive Income Market Share
Cryptocurrency exchanges are offering increasingly competitive options for customers to generate passive income from holding crypto assets.
On March 24, OKEx consolidated its lending , staking, and term-deposit services under an umbrella “Earn” interface. OKEx offers passive income streams for 32 crypto assets.
Lennix Lai, the director of financial markets at OKEx, recently told Cointelegraph, “Staking is a unique passive income that could never be available in the traditional banking market. There’s no staking product in banking and finance.”
On March 23, Crypto.com launched its “Crypto Earn” services, offering returns of up to 12% per annum on TrustToken stablecoins deposited on the platform.
Sean Rach, CMO of Crypto.com, told Cointelegraph that the increasing proliferation of products that generate passive income is allowing crypto to “compete with banks for users who are frustrated with incumbent financial institutions and their traditional models of banking.”
Chicago DeFi Alliance Launches To Save Decentralized Finance
Amid the apparent ongoing collapse in decentralized finance (DeFi) lending, a group of major trading and cryptocurrency companies in the United States are launching an alliance to support the sector.
Introduced on April 7, the Chicago DeFi Alliance (CDA) aims to provide DeFi-focused startups and entrepreneurs with support and guidance in complying with trading regulations and other applicable requirements.
Chicago DeFi Alliance To Share Its Expertise To Boost DeFi Liquidity And Markets
According to a blog post by crypto fund Volt Capital, a founding member the CDA initiative, the alliance also includes major brokerage firm TD Ameritrade, crypto investment firms CMT Digital, DeFi startup Compound Finance, Chicago trading shop DV Trading, Cumberland DRW, and financial services firm Arca.
Specifically, the CDA will support all-stage startups in crypto finance, including market makers, liquidity, product feedback, professionalized traders, and talent.
Providing startups with expertise and “real world” trading feedback, the Chicago DeFi Alliance plans to help them improve liquidity, tap new talent and traders, as well as comply with regulatory requirements.
The initiative also revealed that the first cohort of startups includes DeFi protocol DyDx and Yield. Within their partnership with the CDA, the startups will be sourcing liquidity and onboard new traders.
What Is DeFi?
As reported by Cointelegraph, decentralized finance, or DeFi, combines the implementation of major crypto-associated tools like digital assets, smart contracts and blockchain-based decentralized applications in financial services such as credit and lending.
The DeFi industry has been growing in recent years, with DeFi markets hitting $1 billion in February 2020, surging over 70% from $276 million in February 2019.
As the world economy reacted to the coronavirus crisis, DeFi markets subsequently collapsed to $360 million in the total value on April 5, according to analytics site Defipulse.com.
MakerDAO — the largest application in Ethereum’s DeFi ecosystem — has been experiencing some major issues since March.
As reported by Cointelegraph, MakerDAO’s decentralized protocol was left with millions of dollars in debt from under-collateralized lending after Ether prices dropped 30% in 24 hours on March 12.
While Quarterly Ethereum-based DApp activity has surged almost 650% year-over-year (YoY), both EOS and Tron-based DApps have seen a decline in volume compared with Q1 2019.
DappReview notes $7.9 billion in DApp volume transpiring across 13 blockchains in Q1 2020 — an 82% increase YoY. Ethereum, Tron, and EOS based protocols represent 99.1% of total volume.
The report lists games, exchanges, and casinos as the top three sectors for DApp activity. However, Casinos have seen a 64.6% reduction in volume since comprising the most dominant DApp industry during the first quarter of 2019.
Activity Consolidates Around Leading DApps
Despite total volume growth, the number of new DApps to launch this quarter fell by 60% compared to the same quarter last year. The number of active addresses interacting with the protocols also fell by 22%.
The increase in volume despite the number of new users and projects launching indicates a consolidation of activity around leading decentralized finance (DeFi) projects.
However, the report notes that record volume amid the violent March 12–13 crash also contributed to the quarterly growth in volume for DApps.
DeFi Drives Ethereum DApp Growth
The increasing popularity of leading Ethereum-based DeFi protocols was the primary force driving Ethereum’s 650% DApp growth.
Of the $5.64 billion worth of transactions occurring on Ethereum in Q1 2020, DappReview estimates that 84% can be attributed to ERC-20 activity.
DeFi represented the largest share of Ethereum DApp volume, followed by “risk” protocols such as Ponzi schemes, and games.
EOS And Tron DApp Activity Drops
Despite the massive growth in DApp volume for Ethereum-based protocols, both EOS and Tron saw declines in quarterly activity amid a roughly 75% reduction in casino transactions.
EOS’ Q1 volume dropped 11.67% to $1.74 billion amid a decrease of nearly 90% in average daily address activity from 85,000 to 11,000. However, EOS saw a 225% growth in exchange transactions.
Total Tron DApp activity fell a whopping 74% from $1.57 in Q1 2019 to $411 million this past quarter. 92% of Tron-based DApp activity is casino volume.
Crypto Long & Short: DeFi And Traditional Finance Are Forming An Unlikely Friendship
Decentralized finance (DeFi) and traditional finance are perhaps not as oil-and-water as most think.
There are few topics as controversial in the crypto sector as decentralized finance. Many believe it is the future of finance – removing middlemen will lower costs, unleash efficiencies and create a more transparent, resilient and better-distributed framework.
Others (myself included) find the idea terrifying – a financial system without oversight or an off switch is even more vulnerable to manipulation and error than one that is legally accountable to the user and can be fixed when things go wrong. If a DeFi platform can be “fixed” when things go wrong, just how decentralized is it?
You’re reading Crypto Long & Short, a newsletter that looks closely at the forces driving cryptocurrency markets. Authored by CoinDesk’s head of research, Noelle Acheson, it goes out every Sunday and offers a recap of the week — with insights and analysis — from a professional investor’s point of view. You can subscribe here.
An example of this happened this week: decentralized exchange Bisq, which allows users to trade crypto assets anonymously, suffered a hack involving the theft of $250,000. To prevent a greater loss, the platform developers switched it off.
Obviously, from the users’ point of view it is a good thing Bisq did so. But Bisq also showed the world that it can, which calls into question the concept’s resilience – this time it was for the users’ benefit, but who’s to say that will always be the case? (No aspersions cast on the Bisq team, it’s the concept I’m talking about here.)
While I am personally skeptical of the concept, I am very intrigued by the potential impact DeFi could have on traditional finance. The two are not oil and water, and the automation and transparency of some innovative market functions emerging from the sector could broaden the scope and reach of the fintech applications of tomorrow.
So I perked up when I read about a group of Chicago-based institutional-grade crypto market participants banding together to form the Chicago DeFi Alliance, which aims to support crypto startups during the current coronavirus crisis. TD Ameritrade, Cumberland, CMT Digital, DV Trading and Jump Capital – many of them blue-chip names from traditional markets – have joined with venture capital firm Volt Capital and DeFi startup Compound, to provide advisory services to selected projects.
This group of organizations has plenty of experience in traditional business and finance. Its participants also understand the potential appeal of an alternative system of value based on a decentralized network.
By focusing their energies on enabling institutions to invest in and trade crypto assets, they have already started to build up the intersection between the centralized and decentralized worlds.
This new alliance, if successful, can move that relationship beyond the purely transactional – rather than just investing in and (hopefully) profiting from decentralized assets, its participants will be able to start to sketch out what a deeper interaction could look like, with the experience and sector-wide view necessary to keep it practical.
You may be wondering why I’m featuring a technical upgrade in a newsletter that focuses on investment principles. It’s because bitcoin (BTC) is not just an investment asset – it’s a new technology whose use case is still evolving, and changes to that technology could be material in determining the eventual outcome.
Many investors see bitcoin as an asset without tangible fundamentals, whose price will go up or down according to market sentiment. While this is true, those who insist bitcoin has no intrinsic value overlook that it is more than just consensus around a price.
The intrinsic value of technologies depends on their use case. The narrative around bitcoin’s use case is still evolving – so far, it has not fulfilled its initial promise as a payments mechanism, but that doesn’t mean it never will. Some dispute its role as digital gold given its high volatility. Adoption as an alternative financial rail in areas with rickety and/or intrusive legacy systems is so far muted, given barriers to access and exit.
One bitcoin improvement proposal seriously being considered by the community is known as Schnorr/Taproot. If approved, this could enhance bitcoin’s privacy and scalability features, and support better payments functionality and improved smart contracts. If you’re interested in the details, my colleague Alyssa Hertig explains the proposed changes and their potential ramifications in depth.
But whether tech upgrades are your thing or not, even just talking about it highlights an often overlooked feature of crypto asset investing – it’s not just buying into a technology, it’s buying into an evolving technology. It’s like venture investing, getting in at the ground floor of a potentially important innovation – but in the form of a liquid asset. You enter without extensive contracts and exit whenever you want.
Even beyond the potential of the technology itself, whatever your views on that may be, that ease of access to the possible upside in itself is powerful. (In our just-released CoinDesk Quarterly Review Q4 2020, we summarize the most significant technical upgrades expected in the crypto asset market over the next few months.)
In a confused market peppered with dividend cuts and the unwelcome realization that we are already in a recession, we can expect renewed interest in bitcoin’s correlation with the S&P500.
While last month saw a strong spike in correlations as everything crashed and then rebounded and crashed and rebounded again, it’s likely that we are starting to see an uncoupling. Bitcoin has so far performed better in April than any of the other major indices, in spite of the much-celebrated S&P 500 rally. It has even handily outperformed gold, although the shiny metal is still one of the top-performing assets for the year to date.
Going forward, times of heightened volatility in traditional markets are likely to aggravate bitcoin’s volatility even further; but as things settle into a “new normal,” bitcoin’s resilience and monetary policy, especially as the halving narrative gains in volume, are likely to support further outperformance.
Watch out also for fractures in the physical gold market, which could further destabilize markets overall, while highlighting bitcoin’s relative advantages.
Digital assets are not a claim on assets or income streams, as are bonds and equities – they’re a claim on future services, and as such, don’t lose value in a recession.
TAKEAWAY: This draws on something that we touched on in THE BRIEFING above: the “intrinsic value” of crypto assets. In the case of bitcoin, for example, the future services are the eventual use case of this new technology; in ERC-20 tokens, on the other hand, the future service is more clearly defined, but requires some platform building and/or user growth first.
Either way, this highlights the unusual investment characteristics of crypto assets, and hints that just because they don’t have tangible assets or flows doesn’t mean that due diligence can be overlooked. Will this future service generate enough interest for the token in question to at least maintain its value?
The Bitcoin Fund, managed by Canadian investment firm 3iQ, has started trading on the Toronto Stock Exchanges under the symbol QBTC.U.
TAKEAWAY: The market now has another way for investors to gain exposure to bitcoin without worrying about onramps and custody. So far, it’s still small – the market cap for the listed shares is approximately $14 million – but it’s the first such fund listed on a major stock exchange. It also highlights how hard it is to be a first mover in this space – the firm spent almost three years negotiating with the Ontario Securities Commission before approval was granted.
China-based bitcoin mining equipment manufacturer Canaan Creative, which listed on Nasdaq (CAN) in November, disclosed a net loss of $148.6 million for 2019 on revenue of $204.3 million. Although computing power sold (measured in Thash/s) was up almost 50 percent, net revenues for the year were down almost 50 percent, according to the company largely as a result of the lower price of bitcoin.
TAKEAWAY: Since the figures were released, the share price fell by over 10 percent (to $3.20 at time of writing); it is now down almost 50 percent year to date, and over 60 percent below its listing price.
What’s more, the company has downgraded its expectations for 2020 as a result of the crisis, which is likely to hit the Q1 figures. In an earnings call , the CEO and founder acknowledged a significant drop in December’s revenue. It’s also worth remembering the company is being sued in a class-action lawsuit amid allegations it released false and misleading statements to make its financial health appear better than it was prior to its initial public offering.
Those of you who have been watching this sector for a while will remember the heady days of 2017, when bitcoin’s price climbed ludicrously fast, starting the year at under $1,000 and reaching an all-time high of just under $20,000. Then came 2018, when the price fell by 60 percent over the course of a month.
Well, bitcoin is even more volatile now, if you look at the standard deviation of the natural log of daily returns over the past 30 days. TAKEAWAY: Unprecedented times bring the greatest risk and the greatest opportunity (profound, I know).
Bitcoin’s hashrate is on the rise again.
TAKEAWAY: You may remember that after the price crash of mid-March, Bitcoin’s hashrate (which represents the resources invested by miners in maintaining the network) also fell. Then bitcoin’s self-correcting mechanism known as the difficulty adjustment kicked in a couple of weeks ago, with the second sharpest drop in the network’s history. That, plus the recovery in the bitcoin price, seems to have done the trick: the hashrate is picking up again.
ShapeShift Acquires Non-Custodial Wallet Provider To Expand User Access To DeFi.
Cryptocurrency exchange ShapeShift has acquired Israeli non-custodial wallet provider Portis.
Founded in 2018, Portis is a non-custodial software wallet that was first integrated into ShapeShift last November as part of the exchange’s pursuit of self-custody solutions that don’t require traders to use a hardware wallet.
Speaking to Cointelegraph on April 15, ShapeShift founder Erik Vorhees revealed that following the acquisition, ShapeShift users will have integrated access to multiple decentralized finance (DeFi) applications and services. Meanwhile, Portis users will be able to log in with their Portis wallet and trade cryptocurrencies on ShapeSift commission-free.
Migrating “Away From Fiat And Banks Altogether”
Portis co-founder Scott Gurlick told Cointelegraph that, back when Portis first launched, MultiMask had been the only non-custodial solution in the ecosystem. “Creating something and only relying on Metamask, with the multiple steps it took to set up, was unacceptable. The idea behind Portis was to build something anyone could use,” he said.
Offering a self-custody solution was “non-negotiable,” Gurlick said, yet its construction required a tricky balancing act between security and useability.
At a time when the COVID-19 pandemic has exposed the volatility and fault lines in the global economic order, Gurlick pointed to Portis and ShapeShift’s shared commitment to paving the way for the creation of a borderless financial system founded on open, decentralized protocols:
“It’s a big goal and it won’t happen overnight,” he said, though the development of such solutions at ShapeShift is “certainly moving the needle in the right direction.” Self-custody, in his view, is key.
Reflecting on what the current conjuncture’s political, economic and civic challenges could mean for the digital economy and the blockchain sector in particular, Vorhees noted:
“The central banks of the world have demonstrated that the economic system built around them can only be supported by printing money. This will feel good in the short term, like a dopamine rush, but in the long term could lead to the decline of fiat currency. Cryptocurrency, explicitly designed to prevent debasement, stands ready to help the world migrate away from fiat and banks altogether.”
Making Non-Custodial Services More Competitive
As reported, as a non-custodial exchange, ShapeShift does not require its user to undergo Know Your Customer procedures. The platform has been working towards supporting new features such as debit card purchases of crypto and more broadly, tackling some of the cost and liquidity disadvantages typically associated with non-custodial platforms.
To this end, the exchange recently released an ERC-20 loyalty token, FOX, that enables traders to trade on the platform at zero commission.
Send on Bitcoin, Receive On Ethereum: Atomic Loans Launches Bitcoin DeFi Solution
Atomic Loans is launching a decentralized finance (DeFi) product that is likely to be the closest to a direct implementation on Bitcoin’s (BTC) chain. It doesn’t quite avoid using an external smart contract platform, but it allows directly using Bitcoin for collateral.
The startup announced on April 14 that it had raised $2.45 million in seed funding in a round led by Initialized Capital and with participation from ConsenSys, Morgan Creek Digital and Joe Lallouz and Aaron Henshaw from Bison Trails.
Simultaneously, it is launching the Bitcoin side of its DeFi platform as a public mainnet beta.
Atomic Loans works in a way similar to MakerDAO or Compound. A borrower must lock up his BTC collateral in a special multi-signature contract on the Bitcoin blockchain. Smart contracts on Ethereum then read that data and provide the loan through stablecoins on the other blockchain.
The co-founder and CTO of Atomic Loans, Matthew Black, noted to Cointelegraph that the system does not mint its own stablecoins, making it closer to Compound than Maker.
Like on other DeFi platforms, there is a minimum collateralization requirement below which the lender can trigger liquidation.
For BTC, it was set at 140% — just 10% below what Maker requires for Ethereum, but 7% more than the same percentage on Compound.
Motivating the decision, Black said that they looked at these competitors and “decided to go somewhere in the middle.” The team felt that Bitcoin “was a much more stable asset” and could withstand slightly lower parameters.
For liquidators, the discount on Bitcoin market price amounts to 7%, which is higher than Compound’s 5% and Maker’s 3%.
Black explained that this is due to the longer block times on Bitcoin, which could create additional uncertainty for arbitrage.
Not Yet Permissionless
Like many cross-chain solutions working on Bitcoin, there is an element of trust involved, as Black noted:
“There’s two main points of trust within the system. One is oracles and the other is an arbiter on the Bitcoin side.
[…] Essentially [the arbiters] sign along with the lender in order to move Bitcoin from its current location to the atomic swap contract.”
Trusted oracles are generally present in most DeFi platforms on Ethereum, though some may be more distributed than others. The need for an arbiter is specific to Bitcoin, due to its limited script functionality.
The Arbiter Will Be Atomic Loans Itself, Though The Startup Has A Plan To Solve This:
“For V2 we’re planning to remove that arbiter. So that’s in the works to be removed using the discreet log contracts.”
First introduced by MIT Digital Currency Initiative, discreet log contracts make it possible to use oracles when deciding how to spend a transaction. In essence, when entering the contract, the users create all possible transaction combinations based on expected output from the oracle.
The oracle acts as the third party of the multi-signature contract, and when it finally submits the correct public key for a particular combination, that transaction is triggered.
For Atomic Loans, these can be used in a liquidation scenario to split the funds between the liquidator and the borrower, Black explained.
Black estimated a timeline of six months for the introduction of V2, though he noted that this will also depend on feedback from the first iteration.
The Quest For Bitcoin DeFi
The lack of complex smart contract scripting has traditionally been a serious challenge to bringing any kind of lending or DeFi product to Bitcoin. Even bringing BTC as an asset to a different chain usually requires a trusted, or “federated,” bridge, where corporate entities hold custody of the Bitcoin.
“I think there’s a couple of ERC-20 Bitcoin solutions that are working on coming to Ethereum,” noted Black. One of them is Wrapped BTC (wBTC) which is currently live on platforms like Compound.
“But we’ve seen that there hasn’t been that much adoption of it, to be honest, since it is a custodial solution,” added Black.
Despite pointing to some bridging solutions that are more decentralized, Black criticized the concept of using these wrapped assets for collateral:
“I think any time that you move an asset to another chain and it requires some type of external validation or bonding, you will always run into liquidity issues.”
The Recent Events With Makerdao Highlighted That Defi Platforms Can Be Very Vulnerable To Liquidity Issues:
“I think that’s where a model like Atomic Loans is really favorable because we have access to the entire liquidity of the Bitcoin network.”
In his view, this is better than wrapped Bitcoin on Ethereum — which he called “bringing Bitcoin to DeFi.” Atomic Loans, by contrast, would “bring DeFi to Bitcoin.”
Nevertheless, Black conceded that most of the code for Atomic Loans is on Ethereum, as pure Bitcoin DeFi is likely impossible to implement. “It’s bringing DeFi to both [Ethereum and Bitcoin],” he summarized.
Polychain Capital-Backed DeFi Alliance Hits 51 Members
After decentralized finance, or DeFi, markets collapsed in late March 2020, a number of industry players joined forces to support emerging fintech. Today, the Ren Alliance, a new DeFi consortium backed by veteran crypto investor, Polychain Capital, has added another batch of new members. The group’s membership has now surpassed 50 companies in total.
Launched in early March 2020 by DeFi project Ren, the Ren Alliance has added 14 new members, expanding the network up to 51 firms, the firm announced to Cointelegraph on April 16. The new entrants include major decentralized exchange, IDEX, Switcheo, Dex.Blue, 1inch, Jarvis Network, Charged Particles, DEXTF, Zerion, and others.
Cross-chain Future of DeFi
By joining the Ren Alliance, IDEX is advancing its goal of bringing more crypto assets to their customers, the firm’s CEO Alex Wearn said. IDEX, a firm that reportedly handles more than 40% of all DEX transactions, will also be able to offer Bitcoin (BTC) trading through the Ren Protocol, Wearn added.
“DeFi is about removing the need for trusted intermediaries. Our vision is to enable our customers to trade any cryptocurrency without having to trust anyone else with custody of their funds, and RenVM brings us one step closer to that goal.”
Officially introduced on March 2, the Ren Alliance is a consortium of DeFi companies that are helping secure, develop, and utilize RenVM — an open protocol that intends to enable public and private transfer of value between diverse blockchains. The consortium’s concept stipulates that bringing cross-chain assets to Ethereum (ETH) will “expand the utility of DeFi by introducing larger collateral types into the ecosystem.”
DeFi And Interoperability Combination Gets The Industry To Another Level
Ren COO, Michael Burgess, told Cointelegraph that DeFi and blockchain interoperability combination is “a very natural next step in the space’s maturation,”. He explained that interoperability “really just enhances DeFi’s utility” as DeFi has more liquid assets to work with.
While the protocol claims to facilitate both the permissionless and private transfer of value on blockchain, RenVM does not plan to work with private blockchains in the near future, Burgess noted.
“Working with private blockchains is indeed possible with RenVM but not within our short-term roadmap. With that said, we’ll be following updates on Libra and China’s DCEP quite closely.”
RenVM Will Support Three Major Cryptos At The Mainnet Launch In May 2020
Burgess also elaborated that RenVM currently supports Bitcoin, Bitcoin Cash (BCH), and Zcash (ZEC). According to the exec, these three assets will be available immediately within DeFi as soon as RenVM launches in May. Ultimately, RenVM “can support any Elliptic Curve Digital Signature Algorithm based on blockchain,” Burgess noted.
Functions Of The Ren Alliance Members
DeFi projects in the alliance are supposed to work on three main areas, including introducing cross-chain assets to their DeFi app, running a “darknode” in RenVM’s semi-decentralized core, and developing ancillary services to further bolster RenVM.
At launch, the Ren Alliance featured major companies including Polychain Capital, DEX protocol AirSwap, Kyber, and DexLabs. According to public data, Ren raised $34 million in an initial coin offering back in 2018.
On April 7, a group of major trading and cryptocurrency companies in the United States launched the Chicago DeFi Alliance in order to provide DeFi-focused startups and entrepreneurs with support in complying with industry regulations.
DForce Loses 99.95% of Funds in Latest Test of DeFi’s Resilience
Leading Chinese DeFi protocol has lost 99.95% of locked funds in a nearly $25 million hack.
Chinese decentralized finance, or DeFi, protocol dForce has been exploited in a $24.95 million hack that has resulted in its Lendf.Me lending platform going offline.
According to DeFi data aggregator DeFi Pulse, the total value of funds locked in dForce’s protocol has fallen from almost $25 million to just $10,000 overnight.
On-chain data indicates that the stolen funds have been moved into top DeFi protocols Compound and Aave.
DForce Loses Over 99.95% Of Locked Funds In Attack
Mindao Yang, the CEO of dForce, confirmed the attack on the project’s Telegram channel, announcing that it was attacked at 8:45 am on April 19 during block height 9.989.681.
He stated that the dForce team is currently investigating that attack, and requested that users to not place any assets on the Lendf.Me platform.
The attack is believed to have targeted a vulnerability inherent to Ethereum’s (ETH) ERC-777 token standard.
ERC-777 Vulnerability Believed To Facilitate Hack
The same exploit was used to drain more than $300,000 in wrapped Bitcoin (BTC) from smart contracts on the decentralized exchange (DEX) Uniswap containing imBTC — an ERC-777-based tokenized BTC operated by DEX TokenIon.
In response to the attack, Tokenlon announced that no BTC held in custody had been impacted, adding that they had temporarily paused imBTC transfers while considering its next move.
DForce integrated support for imBTC lending on the Lendf.Me platform in January, leading to speculation that it may have also used to exploit dForce.
DForce Attacked Days After Multicoin Capital Investment Announced
DForce’s devastating attack comes less than one week after crypto venture capital firm, Multicoin Capital, announced it had led the DeFi protocol’s $1.5 million seed round.
Multicoin Capital principal, Mable Jiang, told Cointelegraph that dForce was building DeFi’s first super-network of decentralized protocols — likening the project to Asian super-apps, WeChat and Alipay.
Since launching in September 2019, dForce’s Lendf.Me had grown to comprise the seventh-largest DeFi protocol by locked assets prior to the attack.
Bitfinex Lists New Cross-Chain DeFi Token To Drive DEX Liquidity
Bitfinex is planning to list its first cross-chain DeFi token pBTC to further push DeFi adoption and liquidity.
Major crypto exchange, Bitfinex, continues to drive decentralized finance, or DeFI, adoption by announcing support for a new cross-chain DeFi solution.
Bitfinex exchange plans to list pTokens (pBTC) — a new token that aims to unlock cross-chain DeFi liquidity by connecting Bitcoin (BTC) to any blockchain. The token is pegged 1:1 to Bitcoin and is compatible with the Ethereum (ETH) and EOS DeFi ecosystems to date.
Bitfinex To Streamline Liquidity Flows Between Centralized And Decentralized Exchanges
Bitfinex CTO, Paolo Ardoino, told Cointelegraph that the platform expects to add support for pBTC deposits and withdrawals by the end of May 2020. Ardoino elaborated that pBTC will become the first DeFi interoperability-focused token supported on Bitfinex.
“At the moment we are supporting only pTokens but we welcome more projects to work with us to make it easier for our users to obtain access to cross-chain liquidity.”
Ardoino previously endorsed the pTokens project in late December 2019, predicting that cross-chain value transfers would be the most critical issue facing the cryptocurrency sector in 2020.
Thomas Bertani, founder of Provable Things, the main development team behind the pTokens project, said that pTokens’ integration with Bitfinex streamlines the flow of liquidity between centralized and decentralized exchanges. Bertani added that the listing facilitates an easy token switch and creates a new gateway for BTC liquidity to stream into the DeFi ecosystem. As of press time, pBTC is only trading on two markets — Kyber Network and Bancor Network — according to data from Coingecko.
pTokens Launches Bitcoin To EOS Interoperability Bridge
Listing pBTC on Bitfinex comes in conjunction with pTokens launching an interoperability solution. Thanks to this new release, Bitcoin users are now able to use pBTC in both the Ethereum and EOS ecosystems. pBTC was brought onto the Ethereum network back in March 2020. Bertani pointed out that DeFi applications have to be interconnected to contribute to the entire DeFi industry growth:
“Decentralized applications today must interoperate and complement each other like lego blocks in order for the entire DeFi industry to scale. This interoperability is vital for the movement, as liquidity is the catalyst which will help DeFi reach its true potential.”
Bertani Also Added That The Firm Is Actively Working On Other pTokens, including pETH, pEOS, pLTC and pDAI:
“New pTokens such as pEOS and pLTC have already been deployed in a test environment and will also soon be available on Ethereum mainnet. The same will apply to other assets, bringing pETH and pDAI to EOS.”
More Options For Stable Bitcoin Collateralization Via EOS DeFi
While the majority of the DeFi lending solutions integrate Bitcoin via Ethereum, pBTC’s launch on the EOS DeFi introduces Bitcoin as collateral for EOS stablecoins. As part of the initiative, pBTC will integrate with major decentralized EOS stablecoin, EOSDT. Developed by multi-chain DeFi framework Equilibrium, EOSDT will become one of the few Bitcoin-integrated EOS DeFi solutions. It will act as a new DeFi tool to provide the stable collateralization of pBTC.
Equilibrium appears to be one of few established firms that bring Bitcoin to EOS DeFi lending. The EOSDT project positions itself as the first solution to provide Bitcoin-EOS integration, Equilibrium’s CEO and co-founder, Alex Melikhov, said. Melikhov added that the pBTC integration with EOSDT is scheduled for next week.
When a technical issue at MakerDAO triggered millions of dollars-worth loan failures in March, pTokens’ Bertani said that the industry needs new solutions like EOSDT.
“The crypto industry has learned some hard lessons from the latest market falls. We can all agree that stablecoins have proved to be far less “stable” than we first imagined, with recent events like the MakerDAO debt auction exposing some hidden architectural flaws. New solutions are needed to guarantee the stable collateralization of these digital assets like DAI and EOSDT.”
The news comes after Chinese lending platform, Lendf.me, part of the dForce network, suffered a $25 million hack on April 19. The hacker subsequently returned the stolen money as of April 22 after potentially exposing their own identity data.
The Incognito Project Will Give Ethereum DeFi Monero-Like Privacy
The Incognito privacy project is an interoperable chain that will let you privately use DeFi platforms without ever touching Ethereum itself.
Incognito is a new privacy and interoperability project that seeks to anonymize the tokens of every other blockchain. As part of that goal, it is launching private versions of leading Ethereum (ETH) decentralized finance platforms.
Announced on April 24, the pKyber initiative is the first part of Incognito’s initiative to make DeFi private. First theorized in October, pKyber began full-scale testing on April 24. The team plans to release this to the Incognito mainnet on May 7.
How Does It Work?
Incognito is a standalone blockchain that focuses on private transactions. Its privacy technology is based on the same technologies used by Monero (XMR), including ring signatures, stealth addresses and confidential transactions.
Unlike Monero, Incognito focuses on interoperability with other blockchains and supports private tokens. As Andrey Bugaevski, ecosystem lead at Incognito, told Cointelegraph, the project’s goal is to create a universal sidechain for public blockchains to benefit from privacy features.
Bugaevski stressed that while Incognito does not support full smart contracts, it still allows the creation of tokens and a limited set of scripting instructions. These are enough to create trustless bridges with other smart contract platforms.
The pKyber platform uses Incognito’s shielding smart contract to interact with the Kyber decentralized exchange on mainnet. Users transact with pEthereum, a private token, to initiate a transaction with pKyber. Incognito’s “Broker” contract on Ethereum reads this data and initiates an Ethereum transaction on Kyber using its shared pool of public ETH.
Essentially, Incognito acts as a trustless proxy for private trading instructions, allowing a person to swap ETH for the DAI stablecoin without ever interacting directly with the Ethereum blockchain.
Incognito’s roadmap also includes integrations with 0x, Uniswap and the Compound lending platform, all to be finished before July 2020.
A Young But Surprisingly Complete Project
While DeFi integration is the latest Incognito update, the project achieved many milestones since the launch of its mainnet on Oct. 31, 2019. The project provides today a functional way of shielding Ethereum, Bitcoin (BTC), USDT, DAI, BAT, ZIL and several other tokens.
It is worth noting that this system, like any blockchain with opt-in privacy, needs to be used carefully when simply “mixing” funds.
Most of the features are accessible through a mobile-centric Incognito wallet, available for both iOS and Android. The wallet includes dedicated features like Incognito’s decentralized exchange, staking services and token shielding.
There is a proprietary token called PRV, whose primary purpose is to be used for transaction fees. But the fees can also be paid with the token used for the transaction. This was done to maintain usability, with Bugaevski saying:
“We’re not trying to build a new privacy coin. Nobody needs a new Monero or a new Zcash”
Unique Non-Privacy Innovations
The PRV is used as a block reward for validators, as Incognito uses the Proof of Stake (PoS) model. Unlike many other PoS blockchains, it not run an initial coin offering or airdrop as a token distribution mechanism. While there is an initial “pre-mine” of 5 million PRV reserved for development and the team, 95 million more are expected to be created as block rewards.
This poses a problem for distribution, as a pure PoS model would simply have the team own nearly 100% of the supply.
To fix this, Incognito used an innovative solution where stakers can borrow 1750 PRV (about $700) as their stake and obtain part of the rewards from that loan. Currently staking can only be done on dedicated node devices, which simulate the acquisition of a mining rig.
The System Is Thus “Rigged” To Work Like A Proof-Of-Work System For The Initial Distribution, With Bugaevski Explaining:
“The theme here is that every node in the network has the same power. So there is no way that you put more tokens, and you have more [staking] lots.”
The project also proposed an innovative solution to the trustless bridge problem in Bitcoin: decentralized custodians. Unlike custodial bridge systems currently used for tokenized Bitcoin, Incognito’s bridge would use a system based on economic incentives and collateral slashing — similar to MakerDAO — to completely decentralize custody.
This small project thus appears to have solved some of the more complex problems in cryptocurrency without really compromising on decentralization.
Kyber Network Activity Surges As DEX Plans Switch to Staking Model In Q2
A planned upgrade that would allow token holders to earn staking income is bringing out users in droves to Kyber Network, a decentralized exchange (DEX) for cryptocurrency trading.
The number of addresses with a balance in Kyber Network Crystal (KNC) – an Ethereum token that fuels operations on the DEX – reached an all-time high of 61,980 on April 27, according to the blockchain intelligence firm IntoTheBlock.
The number is up 14% from the tally of 54,210 addresses seen on Jan. 1.
“With more addresses, we are seeing more users and the community trusting and embracing the Kyber’s growth potential,” said John Ng Pangilinan, managing partner at Signum Capital, which is an investor in Kyber Network.
Kyber’s active addresses, price and trading volume have also witnessed solid growth this year.
The number of active addresses using KNC on a given day has increased by over 100% over the last 12 months, as noted by IntoTheBlock’s report.
Meanwhile, the token’s U.S. dollar-denominated price recently rose to nine-month highs near 82 cents in March and was last seen at 67 cents- up 260% on a year-to-date basis, as per data source Messari. Bitcoin, the top cryptocurrency by market value, has added just 8% so far this year, according to CoinDesk’s Bitcoin Price Index.
Daily trading volume surged from $10 million in early January to $240 million in mid-March.
While first-time Kyber users have doubled since the beginning of the year, USD and ether (ETH) volumes on the DEX have more than tripled, according to the network’s official blog.
On March 12, bitcoin crashed by over 40% and extended the decline to levels under $4,000 on the following day, injecting extreme volatility into the broader crypto markets. On March 13, Kyber recorded its highest daily activity with $33.7 millon traded over a single 24-hour period.
In Search of Yield
The surge in investor interest could be attributed to the upcoming protocol upgrade Katalyst, which will allow KNC holders to earn yield on their token and participate in determining and facilitating economic flow on the network. The upgrade is expected to take place at the end of the second quarter.
Backing up a bit, Kyber Network is an on-chain exchange that allows an instant trading and conversion of cryptocurrencies and tokens with high liquidity.
It does so with the help of reserve entities – either internal or arranged by third parties – which bring liquidity to the platform; reserve managers who maintain the reserve, calculate exchange rates and feed the data into the network; and the Kyber Network operator, which adds and removes reserve entities.
The reserve managers are required to purchase KNC tokens to operate a reserve on the network, and pay a small KNC fee to Kyber each time a transaction or a token exchange occurs. The fee is then used to reward third parties who bring trading volume to the network and the rest of the tokens are taken out of circulating supply via coin burn.
Put simply, Kyber currently relies on coin burn to provide value to KNC holders.
However, following the impending protocol upgrade, KNC holders will receive a cut of transaction fees in the form of ETH relative to the number of tokens staked. “Also, reserves would get rebates for volume generated and wouldn’t have to hold KNC to operate on the network,” said Shane Kong, marketing manager at Kyber Network.
Staking refers to the process of holding coins in a cryptocurrency wallet to support the operations on a blockchain in return for newly minted coins. In layman’s terms, it is similar to earning interest on a fixed income investment like bonds.
Essentially, the protocol upgrade will allow holders to earn yield by staking the tokens.
“These additional ways to generate yield via staking, coupled with token burning is a major incentive to purchase and hold KNC,” said Connor Abendschein, crypto research analyst at Digital Assets Data. “This could be the reason why we have seen such a drastic rise in the number of addresses holding KNC.”
Pay For Participating
Other decentralized exchanges have been turning to staking models that allow holders to generate higher returns as the network grows.
For instance, the Ox protocol implemented a staking system for ZRX token holders in December, when the Ox V3 upgrade went live on Ethereum mainnet.
However, KNC staking will earn rewards only if the holders vote on network issues under a new community platform for decentralized governance.
That platform, known as KyberDAO, is to launch simultaneously with the Katalyst upgrade.
“It will complement the new token model, where KNC holders, who stake KNC, will get to vote for proposals and earn voting rewards in ETH,” Kong said.
Essentially, the decentralized autonomous organization (DAO) will give more power to the wider community in determining key parameters of the network such as network fees, burning ratios and reserve incentives.
“The fact that holding KNC will allow investors to participate in developing the protocol could also be a prominent reason for the rise in addresses with KNC balances,” said Pangilinan.
Kyber, being an on-chain liquidity protocol, is also benefiting from the growth in the decentralized finance (DeFi) space, where there is an increased need to swap assets.
In February, bZx, a DeFi lending protocol that uses Kyber Network’s price feed, suffered an oracle attack, which saw a trader walk away with a profit of 2,388 ether ($468,000 as per the latest ETH/USD rate).
Some observers criticized Kyber for low liquidity back then. “The attack came down to bad price data, specifically from DeFi network Kyber”, bZx co-founder Kyle Kistner told CoinDesk at the time.
That, however, did not have any negative impact on KNC’s price or reputation as a price oracle, or supplier of price information.
“As investors, we watched the fall out happen but KNC held its price and started to bounce back,” said Pangilinan.
KNC’s price rallied by 18% on Feb. 18 – the day the attack took place.
The network is now being used by over 100 decentralized applications, more than 45 reserves and is the most used DeFi project on Ethereum.
New projects including Rarible, Unstoppable Domains, Bullionix, Gelato, and Idle Finance integrated the protocol in March and April.
Bancor’s Upcoming V2 Upgrade To Solve ‘DeFi’s Dirty Little Secret’
Bancor claims liquidity providers would risk losing value in their stake due to an issue called impermanent loss.
On April 29, the Bancor (BNT) project revealed its plans for the V2 upgrade of its platform. The overhaul addresses some of the major usability issues that have plagued the project since its launch in 2018.
With Bancor V2, scheduled for launch in Q2 2020, the team believes to have solved several risks incurred by liquidity providers to its platform. Bancor operates through automated market makers. This eliminates the need to maintain an order book. Instead, it relies on pools of liquidity and a price slippage mechanism to emulate natural fluctuations in price.
Liquidity providers earn trading fees, but in many cases they will suffer an “impermanent loss” that diminishes the value of their staked liquidity.
Nate Hindman, head of growth at Bancor, told Cointelegraph that this happens when the relative prices of two tokens change. He explained through an example:
“When ETH’s price goes up relative to DAI, that essentially gives an opportunity for arbitrageurs to balance the pool. And this can cause impermanent loss.”
Since the relative value of each side of the pool changes, it is possible for a user’s initial stake to be a different percentage of the total pool, especially if it was initially a stablecoin. The user would thus withdraw less money than they put in.
Another issue that limited Bancor’s adoption was the need for projects to purchase its network token. Many users were faced with a dilemma, as Hindman noted:
“A lot of liquidity providers don’t want to lose their long position, or token projects that are very rich in their own token, don’t necessarily want to convert some of those tokens to BNT.”
The Chainlink Solution
The solution to both these problems was to use a price oracle provided by Chainlink (LINK). The oracle can be described as a crutch for Bancor to lean on when balancing the relative liquidity between different tokens.
As Hindman explained, “it’s allowing Bancor to build these pegged reserve pools where the relative reserve values are not changed.” In these pegged pools, each conversion will trigger an oracle call. These will “balance the liquidity pools” according to the relative contribution from each user.
The impermanent loss problem does not exist on “stable” pairs, such as conversions between different stablecoins, or wrapped and unwrapped versions of the same token. The Chainlink integration thus reduces risk for liquidity providers, who could otherwise lose money from staking.
Oracles are found in many decentralized finance, or DeFi, products. However, many of these projects created their own proprietary versions. Asaf Shachaf, Bancor’s head of product, explained why the team decided to use a third-party partner, Chainlink:
“We are experts in liquidity pools. This is where our focus is and what we do best. Chainlink are experts in oracles. They know how to make oracles that are […] more resilient to market changes.”
Facilitating The Rise Of Automated Exchanges
Hindman referred to the impermanent loss issue as “DeFi’s dirty little secret.” He claimed that Bancor’s competitors, like Uniswap, also suffer from the same problems.
According to the team, three key features present in Bancor V2 will help make this type of exchange more popular. While the removal of impermanent loss and exposure to multiple tokens were mentioned, a third problem is the excessive slippage experienced by users.
Bancor solved this issue by adding an amplification coefficient. This reduces the amount of slippage relative to the total value in the liquidity pool.
That approach comes with its own risks, however, as it can result in the liquidity pool being drained completely. This is why it was previously only used on stable pools, as Shachaf explained:
“This risk is eliminated when you take it into ‘stable-to-stable’ pools, because you know that the price of the token is always the same. It’s always aspiring back to the same value.”
With Bancor V2, it will be usable on volatile pairs as well thanks to the oracle integration.
As Hindman revealed, market feedback was not very positive when dealing with users or institutions due to these “secret” issues, though he emphasized that they are not unique to Bancor. He concluded:
“We expect and we hope that this [V2 upgrade] will bring tons more liquidity to the protocol. And that we won’t have to have these conversations about impermanent loss or providing liquidity and also holding another token in addition.”
In the future, Bancor will also integrate with lending protocols to provide liquidity and drive further profits. This would decrease the opportunity cost of staking on Bancor, Hindman said.
DeFi Is Exposing Inadequacies of Cold Storage, Says Crypto Custodian
The president of crypto custodian Anchorage, Diogo Monica, believes that DeFi is exposing the shortcomings of cold storage and manual operations.
Cointelegraph spoke to Anchorage co-founder and president, Diogo Monica, to get his take on how the rise of decentralized finance (DeFi) is impacting the crypto custodian sector.
Monica stated that the increasing complexity of DeFi “is beginning to expose the inadequacies of cold storage custody and manual human operations.”
Anchorage’s president emphasized the additional risks incurred through the array of on-chain actions necessitated by many DeFi protocols, stating, “We see in our support for MKR governance, executive voting, and polling that clients want and often need to participate in on-chain activities.”
“As new and emerging protocols increasingly require this kind of active use of private keys, some custodians are having to put more trust in untested smart contracts, which can put client assets at risk.”
Institutions Demand DeFi Exposure
Monica said that Anchorage had noted institutional demand for DeFi exposure, stating, “Our institutional clients want to invest in a range of digital assets, including new DeFi projects and stablecoins.”
“Anchorage’s mission is to increase institutional participation in the crypto space, and DeFi is where a lot of the most exciting innovations are happening right now,” he said.
Efficacy Of Distributed Custody System Bolstered By COVID-19
The Anchorage co-founder stated that the firm’s distributed processes have proved particularly useful in the context of the coronavirus pandemic.
“Anchorage does not rely on manual human operations or require access to physical vaults or safety deposit boxes, unlike custodians that use cold storage,” he stated, adding:
“This point of differentiation is especially critical during the current pandemic: our solution works as it should even though our workforce is completely distributed, whereas other solutions depend on people physically getting themselves to whatever secure location is storing private key materials.”
Anchorage Supports Forthcoming Tokens
Anchorage recently announced support for Compound’s governance token (COMP), which comprises the fifth yet-to-be-released crypto asset supported by Anchorage, including TrustToken and Celo.
“Anchorage is always looking to support new cryptocurrencies in demand by our clients,” Monica stated.
The DeFi Hack: What Decentralized Finance Should And Shouldn’t Be
The DeFi sector will continue to grow in the future despite the difficulties that the industry has faced since the beginning of 2020, but be careful by choosing whom to trust.
Decentralized finance, or DeFi for short, became a buzzword in 2019 following the valuations of MakerDao and Compound after both companies raised sizable rounds from the elite Silicon Valley-based Venture Capital firm Andreessen Horowitz.
2020 has been a difficult year for the crypto DeFi sector — it’s been going through the wringer. Over the weekend, the dForce ecosystem protocol Lendf.me lost 99.95% of its funds from a hacking exploit. Just days later, the hacker leaked information about his identity that resulted in him returning most of the stolen funds.
This news comes following DeFi’s greatest test on March 12, when the Ether (ETH) price sharply fell, causing systems to become overly stressed and fail. The big loser that day was MakerDao, whose poor architecture and infrastructure was exposed due to the limitations of the Ethereum network.
The leading decentralized finance platform MakerDao accrued debt that had to be bailed out by its venture capital firm’s money. A month later, DAI’s dollar peg was experiencing stability issues and a $28.3 million class-action lawsuit was filed against the Maker Foundation in the Northern District Court of California for negligence. Users want their money back.
Back on April 18, $25 million in Ether and Bitcoin (BTC) was stolen from users of the lending protocol Lendf.me. Lendf is a protocol with security issues and is part of the dForce Foundation’s ecosystem.
Surprisingly, it was actually able to collect almost all funds back from the attacker who exploited the reentry loophole in its protocol, as he eventually returned almost all of the money he had stolen. After draining $25 million, the hacker returned $24 million of it, keeping $1 million for himself for… you know, gas fees and these difficult COVID-19 times, maybe.
Ironically, the hacker didn’t return the same mix of assets that was stolen, instead returning the $24 million in a different combination of cryptocurrency tokens. This comes immediately following the news that the dForce Foundation closed a $1.5 million round led by Multicoin Capital, with participation from Huobi Capital and CMB International last week. We can assume these funds are going to cover the losses from the hack.
I spoke with two DeFi CEOs of Compound Finance and Kava Labs to ask them about their experience with dForce and what key takeaways the hack can teach the DeFi community.
Brian Kerr, the CEO of DeFi lending platform Kava Labs, spoke to Cointelegraph about what went wrong with dForce that allowed this hack to transpire. In mid-2019, Kava announced its stablecoin USDX. Shortly after, dForce released its own stablecoin ticker name as USDx.
The use of Kava’s USDX ticker displays the limited creativity at dForce, which is likely extended to its code and technical talent as well. Robert Leshner, CEO of DeFi lending company Compound Finance, personally spoke with Cointelegraph in an interview, following his tweet about the $25 million hack and claiming that the company stole code that is recognizable as Compound’s.
During The Phone Interview With Cointelegraph, Leshner Explained:
“Building on-chain is merciless; security requires a team’s full attention. When teams redeploy code they haven’t written, it makes it impossible to know how, or why, the code works, or what the risks are… anything less is an injustice to users. And users should demand better.”
Sadly, dForce has become an example of what DeFi shouldn’t be.
So, What Do You Need To Know?
In the case of both MakerDao and dForce, what started as a disaster is now in the process of being resolved. Though a significant sum of the funds are still unaccounted for, the experience has left users seeking alternative DeFi lending platforms that they can actually trust.
Many users have lost funds, and many others feel wary simply from reading DeFi news these days, even if their money hasn’t been compromised by either MakerDao or dForce. As a subfield within the crypto space, DeFi is still very young.
Was it really dForce’s responsibility?
Leshner said that the dForce firm “copy/pasted Compound v1 without changes.” According to Leshner, the company alleges that the Compound v1 code “was not flawed,” but that the group was cautious about the asset it listed, according to his tweets.
The dForce team copied code it did not fully understand from Compound and illegally deployed it as its own while changing a few parts without realizing the security issues involved, according to Leshner.
Also weighing in was Kerr. Kava Labs — a DeFi lending platform similar to MakerDao, but while MakerDao only accepts ETH tokens, the Kava platform accepts any asset including Bitcoin, Ripple (XRP), Binance Coin (BNB) and Cosmos (ATOM), which can be used to mint USDX, the platform’s stablecoin.
These milestones of the platform’s development came prior to dForce knocking off the ticker name USDX for their own stablecoin. Kerr shared that Kava aims for USDX to become a major player in the global financial system.
Based on Kerr’s account to Cointelegraph and stated in his reply to Leshner on Twitter, dForce heavily marketed Lendf.me to the world without first running very basic audits: “A basic audit from any reputable firm would have caught this — reentrancy is a known issue and easily checked for.
Outside of stealing Compound’s code, DForce also stole Kava’s USDX token name and ticker — despite us announcing our token many months before they even had a platform.” Kerr admitted, “It’s a terrible example of what DeFi should not be.”
As Trust Is The Most Central And Important Foundation For A Relationship Between A Person And Their Money, Kerr Believes The Responsibility Was With “Both The Dforce Team And The Application’s Users.” He Continued:
“dForce didn’t understand what they were doing and marketed an unsafe product. The users didn’t do their own due diligence on the team or the codebase to determine if the product is safe for use.”
DeFi Shouldn’t Be Brazen
As previously reported by Cointelegraph, dForce’s hacker used the imBTC token as a “trojan horse” of the attack — as an Ethereum wrapper for Bitcoin. Leshner explained that the security error came from a known reentrancy attack: “This is a followup attack to the imBTC Uniswap attack yesterday.” He went on to say, “imBTC is an ERC-777 token and not a normal Ethereum asset. Smart contracts that include imBTC have to be extra cautious and write additional code to protect against reentrancy attacks.”
This is considered to be a well-known vulnerability of the common ERC-20 standard, especially when used in the DeFi context.
DeFi Shouldn’t Be On Ethereum
The Ethereum network’s architecture doesn’t meet the scaling and security needs of the DeFi sector, as the level of testing required to achieve all outcomes is infinite in the Solidity programming language, according to Kerr. “For these reasons and many others, leading projects including Binance, Cosmos, and Kava have chosen to leave the Ethereum ecosystem for greener pastures,” he said.
“Building any financial service on the Ethereum Network is problematic for security. Testing the possible outcomes and bugs of Solidity is near impossible as it can do virtually anything as a Turing Complete Language. While powerful, it’s probably the worst environment to build financial infrastructure,” stated Kerr, who sees one of Kava’s value propositions is that it is rooted in security standards as a purpose-built platform for all assets requiring safe DeFi services as a top priority.
DeFi Should Be Safe And Secure
Lendf calls itself, “By far the largest fiat-backed stablecoin DeFi lending protocol.” What’s problematic is that Lendf was too focused on raising capital, growth and expansion to maintain its biggest, best and “largest fiat backed stablecoin” claim to fame. Instead of focusing on improving code for security, understanding its codebase, fixing bugs and releasing secure products, the firm was overly focused on profit and perceived status.
Basic audits, for example, were missing completely and hurdles were being jumped too quickly by the team, resulting in a security vulnerability that is yet to be resolved.
The event could have been prevented and users should have seen this coming, according to Leshner, who tweeted details about how the company had stolen Compound’s code: “If a project doesn’t have the expertise to develop its own smart contracts, and instead steals and redeploys somebody else’s copyrighted code, it’s a sign that they don’t have the capacity or intention to consider security.” He later encouraged developers and users to learn a valuable lesson: Don’t give your money to a company you can’t trust.
Kava Labs’ Kerr Proceeded To Quote Facebook CEO Mark Zuckerberg’s Motto Of “Move Fast And Break Things,” Elaborating:
“It’s a great saying to live by for basic software and start-ups, but definitely the worst advice when building financial infrastructure as this past weekend has shown.”
DeFi Should Focus On Users
Kerr also shared, “At Kava, all our code is built from the ground up, in Golang, in very discreet modules that are scoped to very specific actions that we can audit and verify. This means that we can fully test the code to a very high confidence for its accuracy and security.” He continued:
“We value the safety of user funds and put it at the forefront of everything we do. We run testnets, conduct 3rd party audits, and have a substantial peer review prior to any code going live on the Kava platform. Furthermore, all new code must be reviewed and voted for by the validator group securing and staking $KAVA which includes technically savvy operators like Binance, OKEx, Huobi, Bitmax, Hashkey, Lemniscap, SNZ, Dokia Capital and Framework Ventures.”
DeFi Should Verify To Trust
It’s not enough to trust a company because they have big-name investors, as we have seen is the case with dForce and MakerDao. However, we often hear “trust and verify” when we should probably hear “verify and trust” from the DeFi community.
While Leshner is the CEO of Compound, he’s also a personal investor for Kava Labs along with other top backers like Arrington XRP Capital. Kava’s excellent technical team and strict adherence to security measures is what has auditors talking about their code. Prior to Kava Labs’ launch, the lending platform ran a professional audit by CertiK — the leading formal verification and audit firm. In a blogpost on the audit’s results, CertiK stated, “Kava is one of the best codebases Certik has seen from a project to date, especially in the Decentralized Finance sector.”
Finally, Kerr took the high ground in concluding, “I highly encourage anyone thinking of using a DeFi protocol to first check the team for technical competence, check for technically diligent investors, and check that audits and peer reviews have been done. Even then, assume there will always be some technical risk and market risk when it comes to DeFi protocols. It’s a young space and there will be more painful learnings like this to come.”
MakerDAO Takes New Measures to Prevent Another ‘Black Swan’ Collapse
The DeFi lending market MakerDAO has updated its governance protocols to prevent another occurrence of forced liquidations that lead to huge losses.
The decentralized finance lending market Maker, like many crypto participants, suffered losses during the price collapse of “Black Thursday” on March 12. The price of Ether (ETH) declined by about 50% within 24 hours, triggering a zero-bid attack as the Maker system became swamped with a huge volume of liquidations.
In the aftermath of the crisis, Maker recorded losses totaling 6.65 million Dai (about $6.65 million) and has been forced to make sweeping changes to its governance and auction parameters. The project also added the stablecoin USD Coin (USDC) to its collateral pool.
Amid the losses incurred by the project, Maker community members are calling for compensation for vault holders. However, a lack of consensus over the appropriate percentage of the collateral to be returned, as well as the proper ETH–Dai valuation, might delay any such restitution.
The events of Black Thursday represented another significant setback for the DeFi market in 2020, which already saw rogue actors exploit vulnerabilities in flash loans to acquire ETH with zero collateral, thereby causing millions of dollars in losses for projects such as bZx.
Primer On MakerDAO’s Auction Protocol
Before examining the events of Black Thursday, it is important to present a summary of the Maker governance protocol to better understand why the ETH flash crash caused a cascade of liquidations. Simply put, MakerDAO is the base protocol that supports the Dai stablecoin, which is pegged one-to-one with the United States dollar.
Apart from Dai, the project also has another token, Maker (MKR), that acts as a governance and equity token. MKR token holders can vote on matters impacting the MakerDAO protocols, such as fees and collateralization ratios. By depositing ETH into the Maker smart contract protocol, a user enters into a Collateralized Debt Position, or CDP. The Dai realized from entering the CDP is based on the collateralization rate.
Since Dai is supposed to maintain a one-to-one peg with the U.S. dollar, any substantial fluctuation in the price of the base collateral, which is ETH, will cause the debt position to close. This situation is indicative of what happened on Black Thursday. When the price of ETH fell, CDPs ended up not having sufficient collateral to stay above the collateralization ratio. Under normal circumstances, the MakerDAO protocol would trigger automatic liquidations to return capital to the market and make the CDPs “debt-free” once again.
The first step in the process is a debt auction that sees freshly minted MKR exchanged for Dai that is then burned. The token burn helps to repay the underlying debt even when the ETH value is not sufficient to fully collateralize the position. A second step involves a corresponding collateral auction which involves the buying of MKR tokens with ETH. By selling a sufficient amount of the collateral, the system can accumulate enough capital to cover the debt and the associated fees.
Once again, under normal circumstances these two auctions happening concurrently cancel each other out, preventing MKR dilution, as the token is designed to be a deflationary currency. Thus, as long as the ETH price fall does not cause a huge undercollateralization of the CDP and the smart contract protocol can sell the base collateral at or near spot market price, both auctions should see a return to equilibrium of the MakerDAO lending market.
The burning of MKR reduces the circulating supply of the token, meaning the value held by vault holders increases. These market participants also receive liquidation fees and sundry accumulated interests from the auctions.
What Happened On Black Thursday?
As previously reported by Cointelegraph, MakerDAO published a report that provided an examination of the losses incurred from the zero-bid attacks that occurred on Black Thursday. The document compiled the performance of its ETH-collateralized Multi-Collateral Dai — or MCD — system from inception to date as a way of determining a fair compensation formula for affected vault holders.
On that fateful Thursday, panic spread across not only the crypto space but the broader financial markets. The previous day, the World Health Organization officially declared COVID-19 to be a pandemic. This announcement happening amid the Russia–OPEC oil price war saw investors moving to exchange investment assets for cash.
Within the crypto scene, the sell orders triggered a cascade of liquidations, with the crypto derivatives platform BitMEX seeing about $1.6 trillion in crypto long positions decimated in the market panic.
When the spot price of Bitcoin (BTC) and ETH tumbled, market makers seemed unable to ensure any form of stability for the market. Under normal market conditions, market makers profit from the bid–ask spread and provide order book liquidity.
However on Black Thursday, market makers that didn’t withdraw their limit orders ended up holding positions deep in the red. With the main liquidity providers underwater, crypto derivatives exchanges began experiencing a liquidity crunch that reverberated across the market, culminating in BTC and ETH dropping by about 50% each.
The massive ETH price decline meant that MakerDAO MCD CDP positions became undercollateralized, triggering liquidations. Usually, these liquidations proceed via the two concurrent auctions detailed earlier in the text. However, Black Thursday ended up being a black swan event for MakerDAO as liquidators became swamped by the sheer volume of forced liquidations. An excerpt from the report detailing the nature of the zero-bid attack reads:
“One bidder discovered they could actually win auctions for collateral with effectively 0 DAI bids. 1461 auctions liquidated 62,842.93ETH for no collateral return to 320 vaults and a cost of 6.65M DAI to the Maker system itself. This event was not only costly to the vault holders, but was to the Maker system as well, in capital costs, system confidence, and Maker reputation generally.”
According to the report, apart from zero-price bids, half-price bids also occurred during Black Thursday, which contributed to vault holders receiving minimal collateral. The presence of zero-price and half-price bids points to unforeseen issues preventing market participants from submitting bids on particular auctions, allowing rogue actors to acquire ETH with little or no collateral.
As stated by the document, 24.7% is the maximum collateral return seen during “good markets.” On average, the period before Black Thursday saw a collateral return of about 17.77%, which fell dramatically to 2.59% on March 12. In a conversation with Cointelegraph, J. R. Forsyth, the founder of the blockchain project Onfo, commented on the absence of robust fail-safe protocols in Maker’s initial architecture to prevent the occurrence of the zero-bid attacks in the first place:
“The liquidators of the MakerDAO attack did not cope with their responsibilities. The error in the general code did not allow users to take part in the auction. Moreover, the developers did not develop a fallback scenario in advance that would allow them to update the system, not in 24 hours, but faster.”
According to Alex Melikhov, the CEO of the stablecoin platform Equilibrium, the losses incurred by the MakerDAO protocol during Black Thursday have more to do with the project’s shortcomings than the ETH flash crash. In an email to Cointelegraph, Melikhov opined:
“If the system could’ve handled liquidations as initially expected the volatility of the underlying collateral should have nothing to do with the sustainability of the entire debt positions.”
For Forsyth, protocols such as Maker should prioritize detailed audits of their smart contracts, adding: “An important part of the security audit of such protocols should be stress testing, which shows how smart contracts behave in an extreme situation.”
Fallout And Governance Changes
MakerDAO lost $6.65 million as a result of the zero-price and half-price bid attacks on Black Thursday. The event exposed vulnerabilities in the project’s governance protocol during periods of heavy liquidation. According to Forsyth, the losses incurred by MakerDAO are indicative of some of the issues plaguing the DeFi space, stating:
“Probably, the negative experience of MakerDAO will stimulate the appearance of alternative clients and scenarios that can be run in a short period of time. Recent attacks have shown that DeFi protocols are unstable in conditions of increased volatility. In such periods, complex formulas based on their algorithms cease to work.”
For Long Vuong, the CEO of the smart-contract platform Tomochain, projects like Maker should prioritize simpler governance processes that deliver robust security and are resilient to the actions of rogue agents. In a conversation with Cointelegraph, Vuong argued:
“The auction system is complex so preventing liquidations due to prices precipitously dropping during a financial panic requires a proper fail-safe plan. Part of this is to simplify and minimize the governance processes to expedite solutions during emergencies.”
Following the events of Black Thursday, the Maker community sought to implement protocols that would prevent a situation where keepers were unable to participate in an auction bid. The zero-price and half-price bid attacks only worked because those auctions had only one bidder and were thus able to liquidate ETH with minimum Dai bids.
As part of its conclusions in the report, MakerMan, the document’s author, revealed that even during Black Thursday, auctions with multiple bidders returned between 10% and 11% on average to vault holders. With more auction access points added, bid count is reportedly up by 200%, but the collateral return is still far below the 17.77% average during the pre-Black Thursday period. Commenting on the changes made to the MakerDAO governance protocols, Melikhov remarked:
“Increasing auction terms to six hours and getting rid of the auction timer seemed to me sufficient technical measures to prevent a recurrence. Other steps were mostly focused on troubleshooting rather than preventing. Good for the MakerDAO project that community committed to participation in MKR auctions through the arisen syndicates and directly.”
Following the losses incurred, MakerDAO corrected the collateral shortfall via debt auctions with investors buying newly minted MKR tokens. As previously reported by Cointelegraph, venture fund Paradigm Capital led the auction round, winning about 68% of the MKR sold during the process.
Given the fact that the ETH flash crash of Black Thursday triggered the massive liquidations on the platform, MakerDAO has since added the USDC stablecoin as a collateral on its lending market. Commenting on the decision to add USDC as collateral for opening CDPs, Melikhov remarked:
“I think that adding USDC collateral was a necessary measure to stabilize the system after a serious stress test and further dramatic losses. Some users were even considering the proposal for USDC collateral as ‘throwing up the white flag’. We saw that DAI’s price started deviating from its one-dollar target after Black Thursday. It was floating above $1 creating an obvious arbitrage opportunity for potential borrowers of DAI who could lock Ether, get DAI at $1, and sell it with premium.”
Recommendations And Calls For Compensation
With the collateral return to vault holders still low despite the creation of more auction participation access points, the report called for lot sizes no higher than 50 ETH. According to the document author, larger lot sizes are reducing the auction performance despite the presence of more bidders.
Instead of having lot sizes that exceed 50 ETH in a single auction, the report called for a staggering of collateral return, with vault holders receiving half of the total percentage collateral return from smaller lot sizes. The remaining half should then be split between medium and larger lot sizes as a way of creating a baseline for observing auction performance vis-a-vis lot sizes.
The report also suggested that auctions for larger lot sizes should include a higher minimum number of bidders to improve bid efficiency. According to the recommendations, only participants with the necessary capital requirement should have access to larger lot size auctions.
Apart from providing recommendations for future MakerDAO governance protocol changes, the report also aimed to establish a baseline for compensation considerations. However, responses to the report on the MakerDAO forum show that community members have not yet reached a consensus on the preferred percentage collateral return to affected vault holders, as well as an appropriate ETH–Dai valuation.
Loopring DEX Quickly Fixes Major Bug Before It Can Be Exploited
A security vulnerability on decentralized exchange, Loopring, was identified and quickly patched before it could be exploited.
On May 7, Blockchain scalability and privacy specialist, Starkware, discovered a critical security vulnerability in the frontend wallet of Loopring’s decentralized exchange. This bug placed all $5 million worth of the exchange’s funds at risk.
Starkware alerted Loopring, who shut down the exchange and swiftly fixed the bug.
Potential Attacker Could Create All User Account Keys
The vulnerability arose because Loopring users have two keys; an Ethereum key and a proprietary account key. However, the frontend wallet used a 32-bit integer to derive each user’s private key. This could have potentially allowed an attacker to reproduce every key on the platform.
After Starkware demonstrated the flaw to Loopring, the exchange sprung into action, immediately closing down the platform while a fix was put in place.
Loopring users’ Ether (ETH) account keys were not exposed by the vulnerability.
Pats On The Back All Round
Loopring announced that it has since patched the security flaw by strengthening the method by which keypairs are produced.
It has also stopped order matching from existing users until they have changed their trading passwords, and hence updated their keypairs.
Loopring confirmed that no user funds were lost due to the vulnerability, and commended Starkware for its responsible disclosure. Starkware in turn, praised Loopring for its professional and timely response in dealing with the bug.
The fact that it was identified, communicated and fixed before the general public found out shows both the solidarity of the Decentralized Finance (DeFi) community, and how it has developed in recent years.
Ross Middleton, CFO of DeversiFi, which is soon to launch a new platform in collaboration with Starkware, explained the importance of this:
“If non-custodial decentralised exchanges want to take on exchanges like Binance and Kraken then they [must] demonstrate that their technology is just as safe or safer to use than existing options. Starkware’s quick discovery of a vulnerability in Loopring is an example of how much DeFi has matured in handling exploits.”
Paradigm has incubated its first crypto project — an Ethereum-based DeFi protocol promising fixed-rate lending and interest markets.
A researcher from the crypto asset investment firm, Paradigm, has co-authored a whitepaper for a new decentralized finance, or DeFi, lending protocol boasting fixed-interest rates.
The whitepaper for Yield protocol was written by Paradigm’s Dan Robinson and Allan Niemberg — who announced the project on May 8.
Niemberg also announced that Yield Protocol has received seed investment from Paradigm, which will be designated toward building the initial version of the product.
New DeFi Protocol Promises Fixed-Rate Lending
The Ethereum (ETH)-based protocol purports to introduce “fixed-term, fixed-rate lending and interest-rate markets to decentralized finance.”
Yield’s whitepaper describes “a standard for a token that settles based on the value of a target asset on a specified future date, and which is backed by some quantity of a collateral asset.”
While DeFi protocols like MakerDAO (MKR) have garnered significant popularity within the crypto community over the past years, the floating nature interest rates associated with these vehicles have proven to be subject to significant volatility — with Maker loan fees fluctuating between 0.5% and 20% during 2019.
Yield Protocol Takes Inspiration From ‘Zero-Coupon Bonds’
Yield Protocol’s first utility will facilitate the creation and issuance of ERC-20-based zero-coupon bonds — a tradable debt instrument that pays its holder at a fixed price on maturity. The whitepaper states:
“yTokens are like zero-coupon bonds: on-chain obligations that settle on a specific future date based on the price of some target asset, and are secured by collateral in another asset.”
The first of Yield’s bonds, dubbed yTokens, will be yDAI — allowing users to borrow and lend MakerDAO’s stablecoin Dai at fixed rates using ETH as collateral.
$900 million is currently locked up in DeFi protocols in total, of which MakerDAO represents 53.4%.
Bitwala Teams Up With Celsius To Offer Interest To Hodlers
Blockchain banking app, Bitwala, has integrated with DeFi app Celsius to offer interest to Bitcoin hodlers.
German blockchain banking firm Bitwala has partnered with pioneering decentralized finance, or DeFi, platform Celsius to offer annual interest on Bitcoin (BTC) holdings of up to 4%.
Funds deposited from customers who opt to use Bitwala’s Bitcoin Interest Account will be loaned to institutional borrowers via Celsius, earning weekly interest on their Bitcoin in the form of BTC.
German Blockchain Bank Integrates Celsius
Bitwala frames DeFi as “a new way to generate wealth,” emphasizing the opportunity for passive income to be generated from crypto holdings.
Users can deposit from $12 worth of Bitcoin into Bitwala’s interest accounts, and are able to add and withdraw funds at any time. Only network fees are incurred through using the account, with investments and withdrawals processed without cost to the user.
Celsius has facilitated over $6.2 billion since launching during June 2018, with the firm providing loans to a network of over 150 institutional borrowers. Celsius takes 20% of the interest earned on user funds, paying the remaining 80% directly to users.
The returns generated by the app change slightly each week in response to market dynamics.
DeFi Lending As Catalyst For Mainstream Adoption
Speaking to Cointelegraph, Celsius’ founder, VoIP patent-holder and renowned internet entrepreneur, Alex Mashinky, stated that the DeFi platform was conceived “to create something that will bring more utility and create less volatility” and drive widespread adoption.
With global economic conditions deteriorating and banking interests rapidly diminishing, Mashinky argues that offering easy access to interest income unlocks a multi-billion person market for crypto.
“Seven billion people want to earn yield and want to earn interest. If you could just do that, and do it ten, twenty, fifty times better than your bank, and you build trust — that’s how you win [people] over.”
DeFi Lending Attracts VC Backing Despite Sharp Drop In Crypto Fundraising
Despite heavy losses in VC funding across the crypto sector at large, DeFi lending firms saw a more than 50% increase in fundraising during April.
A report published by venture capital research firm, Ana.vc, has revealed a 57% decline in crypto funding from VCs over the month of April.
Despite the decline in overall investment, the decentralized lending sector appears to still be flourishing — raising 150% of its March total.
Crypto Fundraising Plummets During April
The report excludes Bakkt’s raise, identifying 32 disclosed deals valued at nearly $50 million in total, down from $117 million last month.
“Crypto winter isn’t over and is not entirely immune to macro economic trends as [the] majority of the deals are done in equity,” the report asserts.
Ava.vc found that decentralized finance and fintech, or DeFi, continues to dominate overall funding, garnering almost 40% of the monthly total raised by the crypto sector for the second consecutive month.
The second-largest segment of the crypto sector by total raise was firms building blockchain infrastructure with 12.9%, followed by enterprise with 9.7%, and marketplace with 6.5%.
Investment Activity Increases Around DeFi Lending
While most sectors within crypto saw heavy losses in overall fundraising during April, DeFi lending startups saw a 56% increase capital raised — up to $4.84 million from $3.1 million in March.
The gain in equity deals despite the total raised across the DeFi sector falling nearly 60% from $46.21 million to $19.35 million.
Within DeFi, Payment firms were the hardest hit in terms of percentage — falling from 82.6% from $9.24 million in March to $1.61 million.
However, exchanges saw the largest total drop in fundraising, falling from the largest DeFi segment with $12.34 million to just 3.23% — a drop of 73.8%.
Despite Media Hype, Blockchain Games Close No Deals In April
Nearly half of the fundraising took place in the United States, with over 80% of deals closing in the U.S., U.K., and Europe.
The report notes that despite significant hype surrounding blockchain-based gaming platforms from crypto media, no blockchain gaming companies were able to close funding deals during April.
Many People Know About DeFi, But Few of Them Use It
DeFi projects seem to be well known in the cryptocurrency circles surveyed by CoinGecko, but usage is somewhat lackluster, especially for lending protocols.
Cryptocurrency price aggregator CoinGecko conducted a survey with almost 700 of its users to learn more about the trends in decentralized finance (DeFi).
The report, published on May 20, highlights that many cryptocurrency users heard about DeFi and some of its better known projects, but few of these are actually using it.
Out of its sample of 694 respondents, only 11% said they haven’t heard anything about DeFi.
Unsurprisingly, the most well-known and used DeFi app — as defined by CoinGecko — is MetaMask. About 72% of respondents heard of it, and 73% of them used it. The dominance can be attributed both to the platform-agnostic functionality of MetaMask, which is supported by all DeFi projects, as well as its longer lifespan.
Exchanges At The Helm
The highest awareness and usage statistics were found in the category of decentralized exchanges. The survey only analyzed automated platforms relying on liquidity pools, specifically Kyber, Uniswap and Bancor.
The highest awareness levels were for Kyber, which 57% of all respondents had heard of. Uniswap and Bancor effectively split the second spot, with 44% and 43%, respectively.
Uniswap appears to have the most efficient marketing funnel, as almost 48% of those aware of it have recently used it. Kyber trails second at 42%, while Bancor has a much lower ratio of 23%.
In comparison, lending platforms generally have worse usage statistics. Maker is second only to Kyber in terms of awareness at 46%, but only 26% of them used it recently.
Compound was known to only 25% of respondents, of whom 32% said they had used it. The bZx platform presents an interesting case, as 12% of respondents heard of it, but a very small percentage of them tried using it. This may be due to the infamy following their back-to-back hacks in February.
CoinGecko theorized that the lower usage was due to either not offering a compelling use case, or their products being too hard to understand.
It is worth noting that the aforementioned usage percentages would make for excellent conversion rates for any marketing campaign, which normally deal with percentages below 10%. This would suggest that active DeFi users were more likely to answer the survey, but the differences between categories are still notable.
Distrust Of Banks Is Common
CoinGecko’s data reveals a net distinction in attitude to banking between users familiar with DeFi and those who just heard of it.
Of those who said to be familiar with it, 54% would stop relying on a bank completely, while the percentage is just 28% in those who are only casually aware.
The leading cause for those willing to ditch banks is the distrust in the banking system, at 31%, while 21% would do so because they consider DeFi to be a better alternative.
Binance and Eosfinex Join EOS DeFi Protocol To Handle Smart Contract Upgrades
An EOS DeFi project wants to make use of the blockchain’s smart contract upgrade features, enlisting the help of Binance, Eosfinex and others to oversee the process.
Equilibrium, an EOS-based decentralized finance, or DeFi, project similar to MakerDAO (MKR), is adding four block producers to its governance system, most notably Binance.
Other members include Eosfinex, an EOS decentralized exchange affiliated with Bitfinex, as well as stand alone block producers EOS Nation and EOS Cannon.
The group of four will act as “governance supervisors” for the system. Their primary purpose is to sign off on smart contract upgrades for Equilibrium.
As Alex Melikhov, the CEO of Equilibrium, told Cointelegraph, this leverages a distinctive EOS feature:
“One of the main advantages of EOS lies in updatable smart contract code. In other words you can migrate to new versions of your application seamlessly without hard stop of the whole system.”
This approach is different from Ethereum, where new iterations of DeFi protocols generally require a complex migration procedure. The old versions may eventually be shut down to avoid security risks, as was the case with Maker’s single collateral Dai, or they may be left to their own devices, like with Uniswap V1.
Supervisors hold portions of a multi-signature key that is used to authorize upgrades to the ecosystem. They are chosen among “the most known and reliable ecosystem participants who could bid their reputation on the integrity and relevance of the smart contract updates,” Melikhov said. The decision to include new entities rests with all existing council members, and not just Equilibrium, he noted.
This approach is an interesting middle ground in the world of DeFi. In many Ethereum-based projects, the founders of the protocol hold admin keys that give them special rights over the contract, a practice that the community frowns upon. This is usually done with the promise of destroying those keys once the protocol is mature enough.
Equilibrium’s governance is instead “already decentralized,” Melikhov said, though he conceded that it is not a fully trustless process that is secured by economic incentives or algorithms.
The project went for an alternative approach of “creating a proof-of-authority framework which consists of trusted counterparts that are independent according to their background,” he explained. There are no plans to destroy these upgrade keys, as that would imply missing out on EOS’ added possibilities.
This approach fits within the wider context of EOS governance, which is based on agreements between specific stakeholders.
Binance Wants More Uses For BNB
A Binance representative told Cointelegraph that the exchange considers EOS a “promising blockchain for DeFi development,” especially for its cross-chain capabilities. Given that EOSDT recently integrated Bitcoin (BTC) as a form of collateral, the company sees a place for the exchange’s token as well:
“We hope to see our BNB token as an asset integrated into more DeFi apps, and we think it can be introduced as a new type of collateral for the EOSDT stablecoin at some point.“
Binance’s addition as a supervisor does not require the ownership of Equilibrium’s governance token, NUT, as the spokesperson explained. Nevertheless, the exchange seems to be incentivized to see the project succeed.
Tyler Winklevoss: Stablecoin Race To Begin When Wall St Embraces DeFi
Tyler Winklevoss believes that stablecoins will not truly emerge until Wall Street embraces the DeFi sector.
Investor, early crypto adopter, and CEO of Gemini exchange, Tyler Winklevoss, predicted that competition between stablecoins will really begin once Wall Street moves into decentralized finance, or DeFi, during a recent interview with The Defiant’s Camila Russo.
However, despite his optimistic outlook for DeFi, the Gemini co-founder asserted that the crypto industry currently does not offer a killer app that is driving adoption from outside of the virtual currency community.
Inter-Stablecoin Competition Hasn’t Even Began
In an interview with The Defiant, Tyler Winklevoss predicted that the real race between stablecoins will not take form until Wall Street takes an interest in DeFi:
“When Wall Street wants to start investing in decentralized finance, they’ll need a currency. When a decentralized [Real Estate Investment Trust] pays off a dividend or a stock, is it going to pay it to investors in Ether?
Probably not because of the volatility, but in a stablecoin.”
However, Tyler offered a damning appraisal of many existing stablecoin projects, stating:
“A lot of these stablecoins, they just put their own cash deposits to goose up the assets under management to give this perception that it’s bigger than it is. I think it’s kind of bullshit. People see through it.”
Yield Generation Is Critical Crypto Value Proposition
Tyler Winklevoss also emphasized the value proposition crypto assets offer through offering interest yields from staking or DeFi protocols amid the deteriorating global economy, stating:
“Super important in this environment with zero interest rates, maybe negative interest rates, potentially hyperinflation, [is] the ability to earn yield anywhere like 5%, 6%, whether it’s staking or you know, a DeFi money market,” he stated.
Tyler revealed that Gemini plans to provide greater support for crypto assets “that power the DeFi revolution,” stating that the firm will look to offer both trading and custody services.
Despite his excitement for the future, Gemini’s CEO does not believe the crypto ecosystem is yet to produce a killer app capable of driving mainstream adoption on a significant scale.
“I don’t see that mainstream killer decentralized app right now that all of my crypto and non crypto friends are coming onto blockchains to use.“
Ethereum Privacy Protocol Takes Foot Off Brake With Entirely Immutable Contracts
Tornado.cash has launched complete immutability for its smart contracts, despite the potential security risks.
Fledgling Ethereum anonymization protocol Tornado.cash has launched completely immutable smart contracts — rendering the protocol “unstoppable” from May 21.
While the project has extolled the virtues of immutability and declared that “code is law,” many within the Ethereum (ETH) community are advising against depositing funds into the protocol.
Tornado.cash Opts For Complete Immutability
Tornado notes that “[t]here are pros and cons” to its dedication to immutability, declaring heightened decentralization and the inability for smart contracts to be altered as positive virtues of the protocol.
However, the developers concede that “the tornado.cash team is also not able to protect the users from bugs anymore.” In the post announcing the transition to full immutability, the firm also recommends that users consider seeking insurance coverage on their funds.
Despite removing their hands from the version of the Tornado.cash protocol, its developers will turn their attention to building the next major version of the project, hoping to “replicate Zcash features onto Ethereum mainnet.”
Immutability Versus Vulnerability
Crypto analyst David Gerard criticized Tornado.cash’s fixation on immutability, describing the protocol as “a sitting duck for attackers, where security holes literally can’t be fixed.”
“[I]t seems Ethereum developers have already forgotten Ethereum’s first really huge disaster, The DAO,” Gerard added.
“Get To Work, Kids — There’s A Mixer To Exploit!”
Tornado.cash has frequently garnered controversy since launching, receiving significant criticism from the Ethereum community after launching nine months ago.
In response to comments on Reddit, the project’s homepage has since been donned with a warning alerting potential users that it is “an experimental software” that is to be “use[d] at your own risk.”
Celsius Users Can Now Buy Tether Gold Via Debit And Credit Cards
Celsius users can now purchase Tether Gold via credit and debit cards with a minimum purchase amount of $50.
Celsius Network is expanding its partnership with fiat-to-crypto payments provider, Simplex, by enabling its users to buy more crypto with credit and debit cards.
Celsius, a major crypto lending startup, now allows its users to purchase gold-backed stablecoin Tether Gold (XAUT) using debit and credit cards. Announcing the news on May 28, Celsius said that the minimum purchase amount for XAUT is $50, while the annual interest rate accounts for 4%.
Tether Gold Was Rolled Out For Depositing On Celsius App Earlier In May
Alongside Tether Gold, the new integration with Simplex also unlocks credit and debit card purchases for the firm’s native token, Celsius (CEL). According to the firm, Celsius users can earn interest in CEL on 25 different virtual cryptocurrencies at a rate of up to 30%.
The new feature comes shortly after Celsius first listed Tether Gold on its mobile app. On May 5, Celsius rolled out XAUT for depositing on the Celsius app, allowing users to earn 3% of the annual percentage yield. Apparently, Celsius is one of few global companies that offer to earn interest on Tether Gold deposits via credit and debit card purchases.
Cointelegraph reached out to Celsius and Simplex for additional queries and will update if we hear back.
Celsius Users Can Also Buy BTC And ETH Via Credit And Debit Cards
Tether Gold and CEL are not the only cryptos that can be bought via credit and debit cards on Celsius network. In February 2020, Celsius launched in-app crypto purchases through a partnership with Simplex, unlocking Bitcoin (BTC) and Ether (ETH) via credit or debit cards. Similar to other Simplex integrations with major crypto firms like Binance and Huobi, the feature supports credit card issuers, including Visa and MasterCard.
Tether Gold is one of the stablecoins launched by major cryptocurrency firm Tether alongside the controversial stablecoin USDT. Launched in January 2020, the gold-backed stablecoin was subsequently listed by Tether’s affiliate exchange Bitfinex. In March, Bitfinex introduced Tether Gold for futures trading.
Crypto Users Could Soon Receive Interest From Two DeFi Protocols at Once
The Aave protocol has introduced Uniswap tokens as a collateral form, which opens the door to the somewhat risky practice of leveraged liquidity pools on the exchange.
The Aave lending protocol introduced a new market based on Uniswap liquidity tokens, which lets depositors borrow assets against these synthetic tokens.
The Uniswap market was launched and announced on May 28, and it lets holders of specific liquidity tokens use them as collateral to borrow crypto assets from the protocol.
Each liquidity token represents ownership in a Uniswap liquidity provider pool, and they can be redeemed for the actual tokens at any point.
Liquidity providers receive a portion of the trading fees acquired by the Uniswap protocol, making it one of the many ways of earning passive income through decentralized finance (DeFi).
The liquidity tokens cannot be borrowed, which means that no additional income is received when depositing these tokens on the Aave platform.
Stani Kulechov, Aave’s CEO, told Cointelegraph that this will be enabled later on, effectively letting users receive interest from two protocols at once.
However, an interesting use case of this system is opening leveraged liquidity pool positions. As Aave wrote, this will “greatly reduce decentralized exchange slippage,” as the liquidity pools can be inflated through borrowed money.
In order for it to be economically feasible, the trading fees would need to counterbalance the interest rate on the loan and the potential issue of impermanent loss.
Given that trading fees and interest rates are variable, this could result in complex interactions between the two protocols as economic equilibria shift. Nevertheless, the loan-to-value factors for these tokens were set to fairly conservative thresholds of below 70%, which puts a limit to the maximum obtainable leverage.
The Risks Of DeFi Composability
An important risk addressed by Aave is the correct pricing of these liquidity tokens. As these are fully synthetic tokens whose value is algorithmically derived by the underlying assets, failures in Uniswap could threaten the Aave system as well.
To this end, the developers created an independent contract that would independently derive the value of the token based on the amount of underlying assets within the Uniswap contracts. However, deviations from the price of a token on Uniswap and the actual market price can still occur in certain circumstances, which Aave assumes to be an attack on the platform.
The system thus uses Chainlink oracles to calculate the “true” value of the liquidity pools, which becomes the primary valuation method during these discrepancy periods.
Nevertheless, these interactions can result in “coupled risk between the two systems,” as Electric Capital partner Ken Deeter told Cointelegraph. Specifically for Uniswap, the size of its liquidity pools would become dependent on the Aave protocol.
Deeter noted that with collateralized lending, “volatility magnification” effects can already occur on just a single protocol, citing the example of MakerDAO. Borrowers can easily convert their Dai (DAI) into Ether (ETH) and put it back into Maker (MKR), which would magnify their risk from using the protocol.
But the risks from these practices still depends on the system’s parameters, Deeter concluded:
“I think the higher level question is how do these lending systems balance different collateral types (so that one going bad doesn’t bring down the whole system) and what recapitalization schemes do they have, in the case that something does go bad.”
Kulechov said that Aave applies a specific risk framework to prevent instability, noting that the interdependencies are “not that different from the exposures in traditional finance.”
Conquering Decentralized Finance: Enter The Custodians
As decentralized finance becomes a principal focus for both investors and companies alike, custodians will ease their entry, making DeFi the future of finance.
The future of finance is decentralized. Striving to facilitate that prognosis, decentralized finance — or DeFi — is quickly shaping into an alluring prospect for investors and companies alike. Looking to harness this decentralized ideal, rivals to the Ethereum-centric sector are feeling the fear of missing out and leveraging their own blockchains in order to gain dominance. Reaching an early climax this year, DeFi breached $1 billion in locked assets. For the Ethereum ecosystem, this stood as a significant boon, drastically increasing its value proposition — and leading competitors to turn their heads.
With the Ethereum ecosystem intrinsically linked to DeFi, it has become the number one pit stop for developers of decentralized apps. As such, Ethereum boasts some of the best and brightest. Spotting this success, Ethereum’s rivals are entering the fray. While this indicates the DeFi sector is set to grow even further, it also means investors will require a multichain solution.
A white paper released by Binance last month detailed the creation of a new blockchain. Dubbed the “Binance Smart Chain,” the venture aims to bestow upon the firm the ability to create smart contracts. Deployed adjacent to the existing Binance Chain, the smart chain will also support the Ethereum Virtual Machine, bringing the interoperability and programmability of the EVM to the Binance Chain. This, in theory, will make it much easier for developers to simply hop over to Binance.
Binance isn’t alone in this endeavor. Other centralized exchanges, including Huobi and OKEx, have aired their plans for individual blockchain ecosystems. Following in Binance Chain’s stead in 2019, both OKEx and Huobi unveiled plans for their own chains.
Arguably, these exchanges and their new blockchains are making a play for the DeFi sector, and it’s easy to understand why. Crypto-centric companies generally accept that the future of finance is decentralized. However, many presently operate within regional and centralized platforms, exposing themselves to the single points of failure the industry was designed to elude. Exchanges now recognize that they need a global stage to reduce risk and open up liquidity. DeFi is this global stage — and exchanges know it.
This race to the top will inevitably nurture far more innovation within the distinct ecosystems, as well as infinite opportunity and choice for investors. However, it’ll also mean far more administration, leaving traders to navigate between separate blockchain ecosystems.
Another factor comes in the form of Ethereum’s domination of DeFi and the development of Ethereum 2.0, which will provide new scaling solutions and extra space for its DeFi ecosystem to continue to grow. But while most DeFi-based protocols developed today all demand Ether (ETH), for Binance and its contemporaries, it’s a contest of which can create the speediest, most efficient chain to attract the greatest number of developers and users.
Moreover, as Ethereum’s DeFi sector grows, so too does utility for Ether. Its rivals have caught on to this and now want the equivalent, with their own chain and their own tokens — all in an effort to capture market dominance.
Guardians of DeFi
Given the breadth and measure of the companies behind these blockchain ventures, it’s fair to say that each one will be successful — in its own unique way. This, in turn, will likely generate new participants to join the DeFi fray, thus creating a network effect in which DeFi becomes the new standard. However, with so many DeFi ecosystems in conflict, the cost of operating is bound to increase as users begin to work across separate chains. This will also impact the user experience, as investors will need to juggle between wallets and interfaces, which brings us to the issue of compatibility.
In the cryptocurrency space, we observe a fair degree of incompatibility problems, especially between wallets and blockchains. At present, while several DeFi-primed wallet solutions exist, not all offer multichain support. More to the point, however, none offer custodial services.
Now with more companies entering the DeFi ecosystem in the hopes of maximizing earnings potential and growing their investments, ensuring the safe custody of private keys across multiple chains will become more than a headache — especially if users practice self custody.
While Ethereum makes the buying and exchange process slightly more manageable through atomic swaps, routing Bitcoin (BTC) via Ethereum or Binance Chain becomes much more troublesome. Solutions do exist, and others are in the making, but they’re still in their infancy.
Under present circumstances, however, managing tokens in a decentralized way via several protocols is exceptionally challenging. This will only get more complicated as distinct blockchain ecosystems expand.
Much like exchanges, some custodians are starting to realize the significance of decentralized finance. Though even for these entities, the compatibility problem remains. Fortunately, via bespoke solutions such as re-signing technology, real-time independent custodians can act as a mediator between DeFi and traditional finance, allowing users to safely store a multitude of cryptocurrencies and transact with them via any blockchain ecosystem.
The onus isn’t solely on multichain support either. As DeFi and cryptocurrency in general look to become more established within the financial industry, they’ll garner further scrutiny, particularly when it comes to security. This is especially true for institutional and accredited players, and getting these investors on side is essential if the industry is to reach a new standard.
As touched upon, current custody solutions in DeFi are confined to self custody, single-user options. This stands as a significant barrier to adoption, especially for institutional investors. Without a third-party independent custodian, investors enter the DeFi sector completely unguarded, unregulated and uninsured. Moreover, they lack the essential amenities provided by custodians, including insurance, price and margin call alerts, multisignature accounts and whitelists.
This is one of the critical roles custodians can play, be it in the nascent DeFi sector or the broader crypto industry. They add integral elements of control. These include multisig accounts, which enable several account holders — i.e, multiple employees or even a couple — to sign transactions.
Businesses may also opt for multisig controls where more than one user is required to sign a transaction to ensure managing fiduciary and holding risks. Other controls such as whitelists and blacklists help prevent the misappropriation of funds and filter out undesired or unofficial addresses. And alerts can help track performance and inform of a change in asset price, as well as notify on margin obligations to avoid positions being liquidated.
By providing these added layers of utility and security along with effective private-key storage, custodians enable a safe route to access DeFi and digital assets overall for both individual and institutional investors. This is especially true as regulatory compliance becomes a focal point. Not only can custodians provide Know Your Customer and Anti-Money Laundering certainty within DeFi’s regulatory gray area, but they can also endow insurance offerings, accounting for one of the most pressing concerns of almost every investor.
There is also increasing individual and institutional investor demand for staking and governance features built directly into wallet and on-exchange accounts. Custodians need to think about the end user and how to make their digital assets work best for them while they are in custody, as securely and easily as possible.
Forward-thinking custodians may look to integrate the most prevalent DeFi protocols directly into the user interface. By enabling notifications and DeFi portfolio tracking tools to assess holdings, trades and stats — as well as to compare rates between different protocols — custodians can enhance the overall user experience.
DeversiFi 2.0 DEx Integrates Starkware To Enable 9K+ Trades Per Second
The DeversiFi decentralized exchange has integrated Starkware’s zkStark layer-2 scaling technology into its 2.0 incarnation, bringing high-speed trading, instant settlement and withdrawal certainty.
The DeversiFi decentralized exchange, or DEX, relaunched as DeversiFi 2.0 on June 3, incorporating Starkware’s zkSTARK layer-2 scaling technology. This new platform will be able to process over 9,000 transactions per second, while maintaining privacy, liquidity and low fees in a non-custodial solution.
Zero Knowledge Proof Batch Validation
Starkware’s layer-2 solution utilizes Zero Knowledge Proof, or ZKP, technology to bring scalability to non-custodial trading. It achieves this by processing trades in batches and then submitting a single proof for each batch.
This consumes a small fraction of the Ethereum blockchain resources that standard on-chain processing would require. Starkware President Eli Ben Sasson explained the benefits of the technology:
“Commercial grade Defi needs robust cryptography and zkSTARKs are fastest in class, post-quantum safe and can easily scale to tens of thousands of transactions per second with no trusted setup … We are excited to see traders embracing self-custodial trading without sacrificing liquidity or speed”
Benefits Of Layer-2 Scalability
Integration of this technology into DeversiFi 2.0 will bring instant settlement, deep liquidity and withdrawal certainty to the exchange. DeversiFi CEO Will Harborne says it will transform the platform:
“This StarkWare integration will transform the functionality of DeversiFi 2.0. The solutions born out will address the key issue of scalability – but without the usual traditional sacrifices of liquidity, speed, settlement and fees.”
As part of the relaunch, DeversiFi has also assembled a Data Availability Committee, or DAC, including participants such as ConsenSys and Bitfinex. The role of this committee is to retain a copy of the updated account balances and publish this should DeversiFi and Starkware go offline.
This will enable customers to withdraw funds directly from DeversiFi’s Ethereum smart contract. Withdrawal certainty will enable decentralized traders to plan their next trades, reassured that their withdrawals will happen.
The Platform Also Features Native Integration Of Ledger Wallets, With Ledger CEO Pascal Gauthier Saying:
“With DeversiFi 2.0 bringing the speed of ZKStarks and the security of Ledger to traders, it’s clear that this second iteration of the platform is the next step in decentralized finance.”
DeversiFi is the first DEX to integrate zkSTARK technology, although IDEX has been experimenting with its own scalability solution, and layer-2 DEXs are likely to bring wider adoption to Decentralized Finance, or DeFi, in the coming months.
Ledger Users Can Now Connect Their Wallets To DeversiFi DEX
The hardware wallet company has stepped into the world of decentralized finance (DeFi).
Ledger, a producer of cryptocurrency hardware wallets, announced today that its users can now connect their devices to the DeversiFi decentralized exchange, or DEX.
Hardware Wallets + DeFi
As a result of this integration, Ledger has become one of the first hardware wallet makers to step into the space of decentralized finance, or DeFi.
Its users now have the ability to trade cryptocurrencies, confirm transactions, and sign messages directly from their devices — all while retaining the control over their private keys.
Although DEXs are generally considered more reliable than their custodial counterparts, that greater security tends to come at a price of lower liquidity rates. However, the press release claims that users will get access to “instant settlement” and “deep liquidity”.
When Asked About Potential Liquidity Issues, A Ledger Representative Told Cointelegraph:
“In the coming months, Ledger will be launching new features such as buying and swapping, which will be available to everyone with a Nano, regardless of where they trade. Different coins have different liquidities on any exchange–we don’t necessarily see DEX liquidity as a problem.”
DeversiFi relaunched earlier this week, as incorporated Starkware’s zkSTARK layer-2 scaling technology.
The new platform is now reportedly able to process over 9,000 transactions per second, keeping other benefits of a decentralized platform.
DeFi Platform Celsius Hits $1 Billion In Cryptocurrency Deposits
Decentralized finance platform Celsius Network has crossed $1 billion in total cryptocurrency deposits.
Decentralized lending and borrowing platform Celsius Network has crossed $1 billion in total cryptocurrency deposits since its launch in 2018.
The platform claims that it returns 80% of its total revenue to its users and has so far paid its community of cryptocurrency holders $17 million in interest rewards, $12 million of which was in Bitcoin (BTC) and $3 million in its native CEL token.
Thriving Through The Pandemic
The growth of the platform in recent months has been considerable despite the coronavirus pandemic having an adverse effect on most businesses.
In March this year, Celsius CEO Alex Mashinsky claimed that their platform was the first major cryptocurrency lending platform that has turned profitable.
To further expand its user base, Celsius revealed last month that it was adding support for tokenized gold. The platform will also be adding other tokenized commodities in the future.
Unbanking With Celsius
As many blockchain and cryptocurrency projects focus on using the technology to bring banking services to the unbanked population, Celsius is working to unbank people and purportedly provide them a better alternative — one powered by cryptocurrency. Mashinsky said:
“We look forward to the day when billions of people leave the antiquated traditional banks behind and choose to unbank with Celsius. We proved we can bring the power back to the people.”
Mashinsky noted that the app was for individuals who were turned away from traditional finance “due to race, gender, credit score or job status” to earn more than they could otherwise through more accepted means.
The Code Is Key: Solutions for Overcoming DeFi Security Breaches
The DeFi sector can embrace a positive future by following comprehensive security audits and by ensuring best practice in due diligence and quality assurance.
Decentralized finance, commonly referred to as DeFi, has grabbed the attention of mainstream financial and technology audiences alike. While the sector has been applauded for bringing about innovative digital finance solutions from lending to payments, progress has been overshadowed by high profile security breaches. Adhering to these security guidelines will ensure that DeFi solutions will be better equipped to offer users a more instant, safe and secure network than traditional banking services.
New DeFi Market Opportunities Overshadowed By Security Threats
When governments enforced lockdowns to prevent the spread of the coronavirus, the mainstream financial and banking system buckled under the enormous weight of souring loans and the need to process fiscal stimulus payments. Businesses and individuals waited several weeks for government handouts that should have taken only a couple of hours. The COVID-19 pandemic exposed a shortfall in the financial system that had long been evident to DeFi proponents: namely, the inability to provide direct and instant capital access.
Amid the economic and financial fallout from the COVID-19 pandemic and banks’ inability to lend to small and medium-sized enterprises, startups and entrepreneurs have been suffering the massive economic toll. Important businesses are being cut off from essential credit lines as governments unwind temporary stimulus packages earlier than expected. In this new economic environment, DeFi has been offering clear and tangible solutions to capital access and payments processing through the ability to remove cumbersome manual processes associated with traditional payments with instant and low-cost transactions.
Despite promising applications for the technology, critics of DeFi solutions assume that security concerns will continue to overshadow the growth and mainstream adoption of peer-to-peer financial networks. However, through efficient smart contract integration, combined with high-quality coding, DeFi platforms can fully protect users’ funds and prevent hacks, such as those that hit the dForce network earlier this year, from occurring again in the future.
DeFi Lessons From The dForce Hack
The DeFi community celebrated a host of breakthroughs in 2019, including sizable investment rounds, such as Andreessen Horowitz’s $15-million investment in MakerDAO, and big names, such as ConsenSys entering the DeFi ecosystem with a new product suite, dubbed Codefi. In February of this year, DeFi hit another significant milestone when loans locked into decentralized lending contracts surpassed the $1-billion mark for the first time on record.
However, the DeFi community was given something of a rude awakening when news emerged in April that Chinese platform Lendf.me, part of the dForce network, a decentralized finance protocol, was hacked to the tune of $25 million. In another plot twist, a couple of days after siphoning $25 million of funds away, the hacker returned almost all of the funds back to its original location. The incident has since left DeFi industry analysts picking up the pieces in understanding how an attack on this scale occurred, with many alluding to a complex algorithm designed by the hacker.
Analyzing the dForce hack in several parts paints a more straightforward picture, however. The reality is that dForce fell victim due to a lack of thorough due diligence. This lack of due diligence meant dForce relied on using unoriginal code copied from Compound, a leading player in the DeFi lending market; it had little to no security checks or audits; and there were no emergency stop processes in place for smart contracts.
Having been rocked by the dForce hack, can the DeFi community better prepare itself for security threats in the future? By prioritizing security audits and best practice in coding and due diligence, the DeFi industry can once again be reckoned with as a serious force in providing real and tangible digital finance solutions to a global audience without boundary restrictions.
DeFi Security Solutions
A full external security audit, original coding and a testnet launch to ensure the functionality of security measures are only some of the essential steps that should be prioritized to protect users and provide enhanced security on DeFi networks. Writing test and migration scripts is a quick and efficient means to ensure the security and quality of smart contracts. This can be supplemented by deploying other advanced auditing tools, such as code coverage, gas cost analysis, testing with mainnet fork ganache, code linting and continuous integration.
After deploying the relevant advanced security auditing tools, it is worth using any time and resources available to conduct an external security audit. Not only does this sit well with prospective investors but it provides a blueprint in identifying any potential issues that may have been overlooked during the coding stage. Choose a security auditing firm that is well versed in DeFi technology — this will help speed up the auditing process, saving your company time and money.
Once the audit is complete, the next stage of your process should be the testnet launch. This can provide you with invaluable time and the opportunity to identify any bugs on your network. Invite close community members and your team to test the smart contracts. Spend the time and resources at the testnet stage wisely, as it will be more difficult to rectify problems once the beta mainnet is launched. The testnet launch is also a useful opportunity to engage with community members and to make preparations for the beta mainnet launch announcement before launching to the public. These steps taken during the testnet launch will allow you to generate positive user traction and community attention.
The final stage of the internal security audit should include a bug bounty program: an invitation to community members that rewards them for identifying any security breaches or vulnerabilities. This can be done in two stages: the pre-beta launch and post-launch on an ongoing basis. The pre-launch bug bounty has the benefit of inviting hackers to test the smart contracts, allowing them to report any vulnerabilities. After the beta launch, the bug bounty program should be opened up to the hacking community on an ongoing basis. This will ensure that any potential security glitches are identified and resolved accordingly, mitigating any risk from hackers.
Security Solutions Provide A Promising Future For DeFi
Borrowers and lenders across the globe have been demanding more financial solutions and alternatives in managing their wealth. Mainstream financial services have thus far failed in delivering tangible digital finance solutions. Banks, too, have been beset by security breaches, including online fraud schemes and hacks that have stolen credit card and login information from users.
As the coronavirus exposes the cracks in centralized systems and banks come under more strain to process payments quickly and efficiently, the security of centralized systems may yet again be in doubt. This new market environment has unveiled the enormous potential for DeFi solutions to gain further traction in placing financial control back in users’ hands while offering a better and more secure alternative to traditional banking.
Already, we have begun to see significant developments being undertaken across the DeFi landscape with the growth of new financial products from savings, payments and lending. For the DeFi community to reap the rewards from progress being made in the space, conducting security best practice — as outlined above — should be a top priority. By ensuring users’ safety and preventing external hacks, DeFi will be on the path to mainstream adoption. Ultimately, thorough security audits and quality assurance will provide the essential trust and transparency needed for the sector to grow and flourish in this new digital age.
Cosmos-Based Interoperable DeFi Project Launches On Mainnet With BNB Collateral
The Kava decentralized finance project has launched on the Cosmos blockchain, giving users the ability to put BNB for collateral to receive its stablecoin, USDX.
The Kava decentralized finance (DeFi) protocol officially launched on Cosmos (ATOM) mainnet, with an initial onboarding of Binance Coin (BNB) as a collateral form.
Kava works in a similar way to MakerDAO (MKR), allowing users to deposit crypto assets and borrow Kava’s stablecoin, USDX. The project focuses on providing interoperability to DeFi, and promises to onboard collateral from other chains including Bitcoin (BTC) and Ethereum (ETH).
The initial collateral form is BNB, which gives Binance’s token a DeFi use case. It is no secret that the exchange sought to introduce its token to DeFi, previously being involved with the EOS-based Equilibrium.
Kava was incubated by the Binance Launchpad, which likely weighed in on the decision to only accept BNB at launch. The CEO of Binance, Changpeng Zhao, noted that “Kava is creating another use case for BNB, which brings additional value for BNB users.”
The launch is accompanied by a promotional giveaway that rewards Kava lenders with the project’s token, which can be used to participate in its governance.
Interoperable, But Not Yet Composable
The Kava project is the first of its kind to be launched on Cosmos, a project placing heavy emphasis on interoperability with other blockchains. The Cosmos SDK is also powering Binance Chain, which makes the BNB integration on Kava much easier.
There are many projects on alternative smart contract platforms that seek to emulate Ethereum DeFi in some way. For example, a copy-pasted version of the old single collateral Maker was released on Tron (TRX) in March.
As mentioned earlier, EOS has its own Maker analogue in Equilibrium. The project is taking a similar path to Kava with the onboarding of Bitcoin collateral, executed a few days before a similar decision from Maker.
However, one of the strengths of the DeFi ecosystem in Ethereum is the sheer number of projects that can interact with each other — a feature called composability.
That can result in interesting mechanics, like the recent addition of Uniswap tokens to Aave, which can be used to bolster the former’s liquidity pools. Some Uniswap V2 features like flash swaps were also designed with composability in mind. Flash loans and composability could also be abused, however, as evidenced by the bZX hacks.
While Kava is interoperable in the sense of accepting assets cross-chain, there are no other projects for it to be composed with yet. Kava’s CEO, Brian Kerr, told Cointelegraph that Kava’s vision is to become a “DeFi hub” in Cosmos’s model of hubs and zones.
He believes that the architecture makes it easy for other Ethereum DeFi projects like Compound and Augur to be ported on Cosmos, though he sees three different ways this could be done.
They could use an Ethereum bridge to a Cosmos zone “to retain their existing network effect and not need to rewrite their code base.” But he also mentioned that other projects could simply migrate to Cosmos to benefit from an improved infrastructure.
Finally, Another Way Could Be Through Direct Integration With Kava:
“Many smart contracts on Ethereum don’t need their own security, but would benefit from being in the cosmos ecosystem. I imagine Compound or similar systems to Compound being built directly on some of the larger Hubs within Cosmos like Kava.”
DeFi Is Helping Ether Outpace Bitcoin This Year
Bitcoin and ether are soundly beating nearly all major global equities indices on the year. Of the two, ether is handily beating bitcoin’s price performance when the market is moving higher.
Since January, ether’s price performance has been steadily outpacing that of bitcoin (BTC). With over 90% in gains since 2020 started, ether holders are beating bitcoin investors because the world’s largest cryptocurrency by market capitalization is up by just over 30% since January.
One of the reasons for ether’s boost is the increasing use of decentralized finance, or DeFi, said Peter Chan, a trader for Hong Kong-based crypto firm OneBit Quant. DeFi is used for lending and trading, including derivatives, using the Ethereum network’s smart contract technology instead of third parties providing centralized software.
“This explains why we see bigger pumps on ether than bitcoin when the market moves upwards,” Chan added. “Ethereum is evolving much faster than bitcoin with the rapid growth in DeFi.”
Indeed, while dipping considerably during March’s market crash, the amount of U.S. dollar value locked in DeFi has recently surpassed $1 billion once again.
While the amount of price appreciation may have diverged, both bitcoin and ether markets seem to operate in tandem. Since the start of 2020, ether and bitcoin have been heavily correlated.
“With insight, ether has been a better investment than bitcoin from a pure performance point of view so far this year,” said David Lifchitz, chief investment officer at Paris-based quant firm ExoAlpha. “But on the downside, they both behaved identically on downward slides.”
Sasha Goldberg, a senior trading specialist for crypto firm Efficient Frontier, notes ether may rise more than bitcoin but has also dropped more than it, too. “Although it seems that ether outperforms bitcoin, when you look at the bigger picture, bitcoin is down 51% from its all time high while ether is down 83%,” he said.
In early 2018, bitcoin traded around $17,900 on spot exchanges on the day ether touched its all-time high of $1,432. The bigger question may be which one has the highest price ceiling the next time crypto prices break out as they did in late 2017.
Business Is Booming For DeFi Insurer Nexus Mutual Ahead of Ethereum 2.0
Nexus Mutual, an alternative insurance provider for a variety of Ethereum-based DeFi protocols, has seen its risk pool double over the past 90 days to more than $4 million.
Indeed, Nexus can barely keep up with the demand for smart-contract cover in the exploding decentralized finance (DeFi) arena.
“We are in this position where there are lots of people that want heaps of cover, but we don’t quite have enough assets to cover everything we would like to right now,” said Nexus Mutual CEO and founder Hugh Karp. “So it’s a good problem to have and we’re working on it.”
The recent boost has been due to a few large covers, especially on Balancer, a newly launched protocol that is offering bonuses for people providing liquidity. Other significant deals for Nexus stem from DeFi platforms Aave and Compound.
Stepping back, the London-based Nexus may be using bleeding-edge tech but the mutual insurance model dates back to the 17th century and potentially aligns the interests of participants better than today’s profit-maximizing insurance firms.
Nexus is exploiting an unregulated pocket within the British insurance sector called a “discretionary mutual,” where members have no contractual obligations to pay claims. As a provider of insurance, the platform recently proved to be worth its salt, however, making its first payout following an exploit of the smart contract code of DeFi lender bZx.
The way Nexus works is members of the mutual join by purchasing NXM tokens that allow them to participate in the decentralized autonomous organization (DAO). All decisions are voted on by members, who are incentivized to pay genuine claims.
“DeFi is expanding rapidly so I’m expecting the number of yield-bearing options to increase exponentially over the next few years,” said Karp.“DeFi users want the returns available, but want to avoid the smart-contract risk. A new protocol wants liquidity, so they offer some bonus to enhance yield, and more professional users take out Nexus cover to access yield safely.”
Two areas Nexus is updating to help it scale are risk assessment and pricing. Karp said members are about to vote on the changes, and the upgrades should go live in about a week.
Risk assessors effectively choose and price the risks that Nexus Mutual covers, said Karp, which should encourage more participants and ultimately enable more cover to be provided to the wider DeFi ecosystem.
“We’re also updating the pricing mechanism to be simpler but also more flexible. It’s another step towards our vision of allowing Nexus to take on any type of risk, like a super-efficient Lloyd’s of London,” he said.
Eth 2.0 Looms
Nexus sees plenty of opportunity in Ethereum’s gradual transition to Eth 2.0, which is expected to begin sometime later this year. Eth 2.0 moves the network from its more energy-hungry Proof-of-Work (PoW) consensus algorithm to Proof-of-Stake (PoS), a method of staking cryptocurrency in order to keep the network afloat.
Earning a steady yield from staking ether (ETH), is somewhat comparable to the way insurance firms in the real world invest the premiums they collect.
Traditional insurers tend to invest the majority of their funds in relatively low-risk, yield-bearing assets – such as government bonds, high-grade corporate bonds and infrastructure investments, which ideally have a similar cash flow to future expected claim payments.
“From our point of view, [Eth 2.0 staking] will be very interesting because we want to earn investment returns from the float,” said Karp, referring to the risk pool of capital held by Nexus. “We hold a chunk of ETH so we will be able to start staking that and earning a return, which is obviously very important for insurance entities.”
Once staking commences on Ethereum, the Nexus DAO can delegate a large portion of its assets to Eth 2.0 staking, which is “conceptually comparable to a very highly rated government bond and therefore will be very well suited to Nexus from a risk perspective,” Karp said.
DeFi also has the ability for yield to be “stacked,” where one yield-bearing token is deposited into another protocol where it earns additional yield. This comes with additional risks, noted Karp, and must be carefully managed, but Nexus will also look to take advantage of yield stacking, which is something that is not readily available in the regular financial world.
“The medium-term goal for Nexus is to start earning something like 5% on the $4 million float,” which Karp said would likely be a few months after Ethereum’s beacon chain launch in the latter half of this year.
“We are quite likely to purchase a tokenized version of staked ETH, which we are expecting will become available soon after the beacon chain launch,” he said. “That token would earn staking returns immediately and not require Eth 1.x and Eth 2.0 being merged yet.”
Coinbase Pro Announces Support For Compound’s DeFi Token COMP
United States cryptocurrency exchange Coinbase Pro announced the listing of COMP, the token powering the decentralized lending protocol Compound.
United States cryptocurrency exchange Coinbase Pro announced the listing of COMP, the token powering the decentralized lending protocol Compound.
According to a Thursday announcement, COMP trading will start on June 23 at 9 a.m. Pacific Time if the liquidity requirements are met. Furthermore, users will be able to deposit their COMP tokens the day hours before the trading activity is scheduled to start.
Trading Will Start Progressively
After a sufficient — and unspecified — supply of COMP tokens make their way to Coinbase Pro, the exchange will progressively roll out trading functionality for the tokens. There will be two trading pairs including the token in question, namely the COMP/Bitcoin (BTC) and COMP/U.S. dollar pairs.
Initially, the pairs will be available in post-only modes. Limit orders will be allowed sometime thereafter. Once the firm’s expectations for what constitutes a healthy market are met by the pairs, full trading with the market, stop and limit orders will start.
Compound is an Ethereum-based decentralized finance protocol that allows its users to borrow tokens or deposit them in exchange for interest. The announcement notes that “COMP is not yet available on Coinbase.com” which possibly implies that Coinbase’s popular retail crypto exchange will also list the token.
Virtual Economies Gear Up The Gravy Train In Blockchain-Based Gaming
Blockchain games continue to gain acceptance as the infrastructure around virtual economies and NFTs continues to grow.
Virtual economies based on blockchain technology are starting to emerge as one of the biggest upcoming trends in gaming, gaining more traction with investors, gamers and developers alike. The use of nonfungible tokens, or NFTs, which provide proof of ownership and the means to transact the set holdings in a seamless fashion, can drive further adoption of games that use virtual economies beyond the crypto realm.
In the latest development, DMarket, a platform that leverages blockchain technology to enable buying, selling and trading of in-game assets, has closed $6.5 million dollars in venture funding.
The round was led by Almaz Capital, a global venture capital fund with a strong presence in Silicon Valley and Europe. Additional support for the funding came from the payment service company, Xsolla. CEO and founder of DMarket, Vlad Panchenko, told Cointelegraph that this is the company’s first VC funding round after raising $19 million from an initial coin offering in 2017.
DMarket wants to create a virtual economy as an alternative to today’s real-world economy. Panchenko explained that DMarket plans to use the new funds to further develop in-game ecosystems where game developers, players, influencers and brands can co-create video game content securely while generating profit. He said:
“I believe that the future of gaming will resemble virtual worlds where players can truly own their in-game assets. Players will also be able to buy or sell these items more efficiently then what we currently see in real-life.”
Gaming pioneer Trip Hawkins, who joined DMarket as an independent board member and has over 33 years of experience as a CEO and founder of four gaming companies, told Cointelegraph that some distinctive themes are emerging in the gaming industry: “Video games are supporting new business models and a bigger audience. These business models are games that can be played for free, but that contain virtual economies with virtual currencies.”
Blockchain Games Will Drive Virtual Economies
According to Hawkins, industry growth in gaming is now centered around social games and virtual goods economies. He mentioned that there has been a breakthrough lately in esports along with the trading of virtual goods for cryptocurrencies. “These themes are part of the future of gaming,” he elaborated.
While many blockchain-based, in-game virtual economies and social interactions are still in early stages, there has been an increased amount of interest lately from major investors, game developers and traditional gamers.
Investment director of Almaz Capital, Tanya Dadasheva, told Cointelegraph that while Almaz had made prior investments in gaming companies, DMarket is the firm’s first investment within the in-game trading space. Dadasheva explained that she believes virtual economies will continue to rise:
“We are placing our bet on the rise of virtual economies, driven by the desire to personalize the digital persona and express individuality in these virtual worlds. Blockchain technology is perfect for digital items trading, as every item itself is a token, and the marketplace is balancing their relative value. Blockchain creates actual ownership of the items with the ability to trace their uniqueness.”
Atari Meets Blockchain Technology
The benefits that blockchain can bring to the billion-dollar gaming industry is catching on. Gaming giant Atari recently announced that holders of its Atari token will be able to spend it on gaming, betting and shopping. The announcement came following Atari’s partnership with esports firm Unikrn.
The partnership will provide Unikrn users access to Atari’s well-known games like Centipede, Pong and Asteroids. Atari players will also be able to leverage the esports betting platform on Unikrn. The partnership demonstrates that cross-platform play and social play will be major gaming themes moving forward.
Hawkins noted that when players started to play games like Fortnite, there was pressure from gamers to access it on platforms other than PlayStation. Hawkins predicts cross-platform and social play functionalities will be major elements that will allow gamers to spend money to acquire virtual goods within decentralized ecosystems:
“I think we will see players who support certain games wanting to trade items to other players on different platforms. There will be increasing pressure on the gaming industry from game developers who want to support an open market for trading items, which will eventually make blockchain games more popular.”
NFTs Take Off?
Although still an early concept, the blockchain community has started seeing instances where NFTs are being created, collected and traded among individuals. For example, on June 17, gaming giant Ubisoft released a series of blockchain-based digital collectables for its gaming and television franchise Rabbids, offering 55 collectables as NFTs on the Ethereum blockchain.
As with all NFTs, the new collectibles consist of unique properties and designs. Each has its own value and can be exchanged like a trading card. Ubisoft noted that all proceeds from the sale of these collectables will be donated to the UNICEF fund.
Additionally, a new digital trading card series on the WAX blockchain was announced on June 11. Known as Blockchain Heroes, the series was developed by The Bad Crypto Podcast hosts, Joel Comm and Travis Wright. Comm told Cointelegraph that Blockchain Heroes will feature 50 unique superheroes inspired by the personalities within the crypto and blockchain community. Each superhero comes in the form of a digital trading card NFT and features unique designs, properties and value. Comm said:
“Our goal is to create a collector market for blockchain cards. These cards are similar to collectable art. There will be different card rarities — common, uncommon, rare, epic, legendary, mythic level and golden fury. The rarer cards will be more elaborate than the others and therefore harder to find and more valuable.”
Comm, who has been involved with NFT development since 2019, further explained that the market for digital collectables is getting ready to “explode” and will drive mainstream adoption, since it’s a new, yet familiar concept:
“You have people who want to collect digital trading cards, or NFTs, because of nostalgia. You also have those individuals who enjoy the trading, buying and selling process and can earn great revenue.”
Comm further explained that putting trading cards on a blockchain network is beneficial for two main reasons. First, proof of ownership is simple since these collectables are stored in a digital wallet. “As long as you have the keys to your wallet, you have proof that you own that,” said Comm.
Secondly, trading collectables is much easier on a blockchain network, since everything is peer-to-peer. Transparency is another major benefit, as card collectors can see the public history of trades made on different blockchains by visiting certain sites. Ultimately, true ownership of digital assets is a major benefit of blockchain-based games and collectables.
President of Blockchain Game Alliance, Sebastien Borget, told Cointelegraph that the upside of blockchain games is ownership of in-game assets that players can easily transfer and sell on marketplaces. For instance, games where land or gear is presented as NFT tokens can thrive through the use of virtual economies. Borget added:
“Players can earn rewards in the form of tokens or NFTs that can go up in value. Players that dedicate their time to create and earn in-game assets are stakeholders in the game and part of the entire ecosystem.”
Virtual Economies Rise Due To Covid-19 Lockdowns
Unsurprisingly, the coronavirus pandemic has helped blockchain-based games with virtual economies gain traction. An Animoca Brands report shows that gaming has increased since COVID-19 lockdowns, stating: “According to SteamDB, the number of Steam concurrent users gained 23.7% in March and reached 24.5 million on 4 April 2020, setting a new record.”
The report further states that additional revenue sources can be gained from blockchain-based games versus traditional games. For instance, current gaming revenue comes from in-app purchases and advertising. Blockchain games revenue is generated from the pre-sales of in-game assets, transaction fees based on the volume of digital items traded, and true economies being built on virtual grounds. Dadasheva added that the rise of virtual economies due to COVID-19 influenced the firm’s decision to invest in DMarket during this time:
“We are excited about the changes in behavior and perception of virtual worlds, where games are becoming the place to hang out for new generations, the place to express themselves. It’s not just entertainment anymore, and COVID-19 has highlighted this trend. These trends cause the need for new economies, trust in ownership and uniqueness of items, and their transferability between worlds and games.”
While this may be, it’s important to point out that mainstream adoption of blockchain-based games is still underway. Borget elaborated on this, noting that mainstream adoption will only happen once more traditional gamers start playing blockchain games:
“We need these games to reach at least 1 million active users. Once this number is achieved, traditional gamers will eventually jump on board the trend. When you look at the top performing blockchain games today, you only see that there are 10–20 thousand users per month. However, I do think the pandemic has accelerated the adoption of blockchain games and I am bullish that this year and next will trigger a major event for the market.”
OpenZeppelin Discloses ‘High Severity Vulnerability’ In DeFi Wallet Argent
A “high severity vulnerability” was found and patched in Ethereum wallet Argent, according to leading white-hat hackers OpenZeppelin.
Disclosed Friday, OpenZeppelin security researcher Alice Henshaw discovered a vulnerability within Argent that would have allowed user funds to be drained from wallets that did not have Argent’s “guardian” feature.
According To An Openzepplin Blog Post And Press Release, News Of The Discovery Was First Shared With Argent On June 12:
“OpenZeppelin’s research revealed an error in the latest version of Argent’s smart contracts that would allow anyone to trigger the wallet recovery process without a signature – on any wallet with zero guardians – as soon as the wallet is upgraded.”
If attacked, users had only 36 hours to prevent drainage of wallet funds. Even then, users could have their funds frozen through a Denial-of-Service (DoS) attack, OpenZeppelin wrote.
According to Henshaw, the vulnerability stemmed from a March 30 wallet update. OpenZeppelin said 329 wallets with 162 ether (ETH) and undisclosed decentralized finance (DeFi) tokens were at risk. Another 5,513 wallets were vulnerable as well, once they updated to the new Argent software, the blog states.
No Argent funds were affected and a patch has been issued, according to the firm. Henshaw received $25,000 in dai as compensation.
“Only 61 wallets without Guardians and with the affected update were at risk,” Argent spokesman Matthew Wright told CoinDesk. “Our security model meant they had 36 hours to block it by simply tapping ‘Cancel’ in the app. 0 funds were lost. We think it highlights the benefits of having an open-source security model and we’re happy to award OpenZeppelin a bounty for their work.”
Argent Acknowledged The Vulnerability In A Tweet Friday Morning, Thanking Openzeppelin For Its Work:
In March, Argent raised $12 million in a Series A led by Paradigm Ventures. The wallet natively integrates with popular DeFi products such as Maker and Compound.
“The vulnerability discovered by our security researchers could have led to many users losing control of their funds as they upgraded to the latest version of the Argent wallet,” OpenZeppelin CEO Demian Brener said in a statement. “The Argent team has taken quick action to fix this issue so that no user funds were impacted.”
Bancor’s Bug Exposes Dangerously Common Practice In Ethereum DeFi
Many DeFi smart contracts can withdraw unlimited amounts of money from user wallets, potentially spelling disaster.
A vulnerability discovered on Bancor on Thursday would have allowed hackers to simply drain the funds of anyone who interacted with its smart contracts. The exploit relied on the concept of withdrawal authorization, introduced in the ERC-20 standard. This allows various Ethereum-based decentralized applications to automatically withdraw money from users’ wallets.
As Oded Leiba, a research engineer at ZenGo, wrote, the fund withdrawal function on Bancor’s smart contract was mistakenly set so that anyone could call it.
Bancor acted preemptively to “steal” user funds before malicious parties could intervene.
Compounding this issue was the fact that Bancor’s contracts requested an unlimited authorization to withdraw money on the first interaction with the protocol. Even if users only planned to test the protocol with a limited amount of funds, the system could withdraw their entire balance of that particular token.
As it turns out, many other DApps on Ethereum do the same.
Unlimited Approval For An Unlimited Time
As Leiba told Cointelegraph, many well-known decentralized finance apps request infinite approvals. Among those tested by the ZenGo team, Compound, Uniswap, bZX, Aave, Kyber and dYdX all feature infinite or extremely large approvals.
Kain Warwick, the founder of Synthetix, told Cointelegraph that infinite approvals allow for better usability and lower gas usage, with the trade-off of higher risk. So far, most DeFi platforms seem to prefer usability.
Nevertheless, in the wake of the accident, Bancor decided to modify its contracts to only approve the necessary amount with each trade.
Cointelegraph also contacted Aave to learn more about their decision to use infinite allowances but did not receive a response.
Warwick believes that “it is a serious issue as each new contract you give an ‘infinite approval’ to exposes you to more tail risk if the contract is compromised.”
Even when the platform is no longer used, approvals remain in force. Leiba noted that over 160 addresses remain vulnerable to the bugged Bancor smart contract — presumably with no funds. Should they return to activity, however, hackers would be able to steal the money at any point in time.
Standards Are To Blame?
There are fundamental limitations to the ERC-20 token standard commonly used today. For one, approvals cannot have a time limit, which could have helped mitigate some of the longer-term effects of infinite allowances.
Various competing standards such as ERC-223 sought to mitigate the issue by removing the need to grant approvals altogether. In most existing applications, interactions with a smart contract can be manually signed off each time without significantly impacting the user experience.
However, smart contracts cannot respond to unilateral “transfer” calls made by a user. They must instead collect the tokens on their own by using the “transferFrom” function, which requires setting up the allowance via the “approve” method.
Warwick explained that the team initially used the more advanced ERC-223 standard. However, issues with excessive gas usage and errors with contracts that didn’t support the new standard forced the community to abandon it. He added:
“Standards are hard, and when everything is designed for ERC20 unilaterally moving to ERC223 creates a lot of friction.”
How To Fix This
Some wallets allow users to modify the specific amount of the allowance during the approval request — though few clearly disclose what the default value is. ZenGo implemented a system where approvals are sent concurrently with each transfer, which can help protect users at the cost of higher gas usage.
Warwick Shared His Security Practices:
“I do give contracts infinite approvals but I am very careful which of my accounts I do it with and to which contracts I give it to because it is less friction, but much higher risk.”
He also suggested that it is “worth doing maintenance” by removing allowances on unused contracts through tools such as Revoke, Approved Zone and TAC.
DeFi-Nitely A Bubble? Seller Blamed As Comp Crashes 45% On Coinbase
A frenetic day of trading on Coinbase Pro saw unusual activity from what seems to be an early investor in Compound, which briefly hit $427.
The rapid growth in the price of so-called decentralized finance (DeFi) tokens is raising fresh suspicions after one altcoin hit $427.
In a curious sequence of events still unfolding on exchanges, DeFi token Compound (COMP) posted huge gains before crashing almost 50%.
Research Warns Over COMP Shorting
Compound, an ERC-20 altcoin on Ethereum, launched on U.S. exchange Coinbase Pro this week. No sooner had trading begun, however, did selling pressure mount to produce wild volatility.
In particular, an entity assumed to be an early investor in COMP began sending huge numbers of tokens to Coinbase.
The identity of the destination address remains uncertain, but according to detective work by Galois Capital, the movements are indicative of an organized sell-off. Thereafter, COMP/USD fell from highs of $427 to press-time levels of under $235.
“Looks like this investor has another ~25000 or possibly ~87500 COMP if you go backwards one hop on the chain,” Galois added, linking to another target address.
“Would be interesting to see if any of it moves to @coinbase . Probably indicative of short term selling pressure.”
Is DeFi the ICO of 2020?
While COMP clearly fits the description of a short-term bubble induced by Coinbase listing it, reservations about DeFi as an ecosystem have been rising.
This week alone, fellow DeFi token Balancer (BAL) surged over 200% on the back of its mainnet announcement.
As with interest in initial coin offering (ICO) tokens and then stablecoins, huge numbers of projects suddenly appearing, along with sudden jumps in the value of their in-house cryptocurrencies, is fueling concerns that the market itself is overwhelmingly speculative.
Others noted that unlike the ICO phenomenon, Ether (ETH) has yet to benefit from the token boom.
“The last time an Ethereum use case went parabolic (ICOs) ETH went parabolic with it,” Mythos Capital founder Ryan Adams commented.
“This time an Ethereum use case is going parabolic (DeFi) but ETH is missing in action.”
As Cointelegraph reported, even legacy tokens such as Bancor (BNT) and Maker (MKR) have seen double-digit gains over the past week.
Compound’s COMP Token Paves Way For DeFi Yield Wars
Framework Ventures’ co-founder believes Compound’s token launch jump started a trend of DeFi projects competing for yield as public interest and token prices rally.
Recent events surrounding the launch of Compound’s token seem to have been noticed by many other projects in the decentralized finance, or DeFi, ecosystem.
In an interview with Cointelegraph, Framework Ventures’s co-founder Michael Anderson said that the token’s success may provide an example to follow for other DeFi projects who may start engaging in “yield farming wars.”
The result of this will be increased interest in the DeFi space as a whole, Anderson argues. Some of those effects can already be seen in skyrocketing valuations for other tokens, like Aave’s LEND and Synthetix’s SNX.
While Compound’s reward system is not the first, the token’s extremely quick success elevates it above previous examples.
Pricing In Future Success
Anderson compared Compound to a “mid-stage startup that’s hitting revenue growth,” which generates a lot of interest in the traditional investment world:
“You assume that operations grow and the infectivity of that revenue grows, meaning that eventually they can become, you know, as profitable as some of the big Googles and Facebooks that come through that transition.”
According to him, investors in Compound’s token are believing in “what could happen,” and how the growth of DeFi and the platform’s recognition could make billion dollar valuations realistic.
That further sets up a virtuous cycle for venture investors, who see Andreessen-Horowitz initial stake of $40 million balloon to a $2.5 billion valuation. “So what this is going to do is, it brings attention to the space, it brings assets into the DeFi space,” he added.
Yield Farming Wars
Decentralized exchange Balancer has already launched a similar incentive scheme and saw its valuation skyrocket. Its incentive scheme was reportedly gamed by the FTX exchange, and the project informally enacted a change to curtail this.
But despite these issues, Anderson believes that other projects will follow this strategy:
“This playbook of having the token be something that stimulates high APR to drive assets on the platform is going to be what we see for the next six, nine, twelve months, I bet.”
The sustainability of COMP yield farming entirely depends on the price of the token, which “has a long way to go [down]” before interest rates would return to average values. At the same time competition from similar incentives by platforms like Balancer “could be something that drives assets away from COMP.”
Kava, a DeFi project where Compound’s CEO Robert Leshner and Framework are both investors, appears to be poised to implement similar systems. In a conversation with Cointelegraph, lead engineer Kevin Davis said that while avoiding excessive participation is difficult, “a few factors will lead to a cool off in this market cycle, and the crazy price action of COMP won’t be representative of the farming-yield trend.”
Uncertainty On The Success Remains
While the reward incentives attracted many users in the short-term, Davis is unsure if enough of them will truly be interested in the governance aspect. It is also unknown how many people will remain Compound users in the long-term, which in Davis’s view is one of the main goals of the initiative.
While he believes it’s also a valid example of progressively decentralizing a platform, it is still too early to conclusively call it a resounding success:
“It still remains to be seen how much decentralization is achieved, and whether or not the Compound protocol (or the COMP token) has product-market fit in its current form.”
Bubbling Over The Top? DeFi Sector Heats Up In June, Raising Concerns
The DeFi sector is seeing rapid growth in use and volume. Some appear concerned about a bursting bubble, but could it be natural growth?
Decentralized finance is all about cutting out traditional financial intermediaries such as banks. Through the use of blockchain technology, DeFi platforms allow individuals to generate money against their own assets, becoming their own bank, as it were.
As an exciting new business paradigm, the DeFi sector has been warming up for some time. But during this past week, it got downright hot, and the current euphoria has some worried that a financial bubble may be forming reminiscent of the initial coin offering bubble of late 2017. Here are three events being cited:
Exhibit A: Compound Governance Token (COMP), the governance token for DeFi protocol Compound, rose in value from $64 on June 18 to $352 on June 21 following the launch of the ERC-20 altcoin on United States exchange Coinbase Pro.
It eventually soared as high as $427 on Coinbase Pro before settling down — somewhat — at $255 on June 27 — but still up 298% compared with the price from June 18.
Exhibit B: On June 23, decentralized cryptocurrency exchange Balancer announced that its protocol governance token, BAL, was live on the Ethereum mainnet. Within 12 hours, BAL’s price jumped from $6.65 to $22.28.
Exhibit C: The total value of U.S. dollars locked in the DeFi industry sector over the past 30 days has increased by 80%. Compound’s share of total value locked was 38% as of June 26.
The recent turn of events clearly had Sasha Ivanov, the founder and CEO of the Waves Association, worried. “Future inevitable volatility and price crashes can severely harm DeFi mass adoption perspectives, which would be very bright otherwise,” he said.
A Speculative Mania?
So, it seems reasonable to ask: Is the DeFi sector approaching “bubble” territory? This isn’t always easy to determine. As Mati Greenspan, the founder of Quantum Economics, told Cointelegraph: “Bubbles often occur in financial markets, but the thing is: when you’re in one, it’s very difficult to tell if it’s about to pop or just get bigger.”
“It seems like it is undergoing some kind of surge in price akin to the speculative bubble in Bitcoin around 2013,” Jeremy Cheah, an associate professor at the business school of Nottingham Trent University in the United Kingdom, informed Cointelegraph. He wasn’t particularly alarmed though, adding: “Blockchain is here to stay.
Short-run disruptions are to be expected, but its trend is upward given the benefits of blockchain.”
Campbell Harvey, a professor of international business at Duke University, explained to Cointelegraph that what is happening now in DeFi is different than the 2017 speculative craze in Bitcoin (BTC) and other cryptocurrencies — i.e., the so-called “ICO bubble” — in which “bandwagon investors were buying because the price was increasing.” Something more substantial is happening here, according to him:
“DeFi is poised to disrupt traditional borrowing and lending/investing which is an existing market that is massive in size. It is reasonable to expect that DeFi will cannibalize a good deal of the tangible, measurable market and the two questions are: how much of a share and how long will it take?”
Just because the total value locked in DeFi has increased by 80% in the past 30 days does not mean it is a bubble, added Harvey. “Indeed, it is not unusual to see growth like this in the startup space when a product idea catches on.”
Being Paid To Take Out A Loan?
Still, some strange things are happening. DeFi tokens are being “gamed,” behavior that wouldn’t be inconsistent with a bubble. A video analysis making the rounds last week, “Ridiculous DeFi: Compound (COMP) Finance Explained” by YouTube channel Boxmining, raised some questions about Compound’s business model.
Compound’s platform makes money on the spread between deposits and loans — i.e., savings accounts and borrowing accounts — like a bank does, but some users have reportedly “managed to find ways to exploit the system” to obtain COMP tokens that make continued user cycles of borrowing and lending profitable — despite a negative net interest.
As explained by the video’s host, Michael Gu, a user can be “literally […] paid to take out, to borrow out a loan.” This doesn’t work in any traditional banking context. It only works now “because the speculation on COMP is so high, and the value of COMP tokens is also through the roof.”
Greenspan further explained this gaming process in a June 22 post on the website Bitcoin Market Journal: “Many users are then taking the USDT that they’ve borrowed, converting it to USDC, and then lending it back to the platform in order to earn even more COMP, which might explain why the system’s smart contracts now have $600 million in them.” This doesn’t make much sense to Greenspan, as he told Cointelegraph:
“Borrowing one digital asset using another as collateral is a rather funky use case. Unfortunately it seems to be a theme among DeFi projects, but if you have one and want another, why not just swap them outright? If the purpose of the transaction is just to get the additional COMP, then we’re back into the realm of magical internet money.”
Differences From 2017
There is some danger in all this, acknowledged Duke University’s Harvey, especially if utility tokens rise beyond their reasonable fundamental value because investors keep buying, not wanting to miss out on the next big thing. But there are two key differences between this situation and the ICO bubble of 2017, as he shared with Cointelegraph:
“First, investors know a lot more about the cryptocurrency space than they did in December 2017. Second, DeFi has already demonstrated ‘Proof of Concept,’ and the market it is targeting is vast. In December 2017, Bitcoin was being treated purely as a speculative asset.”
Waves CEO Ivanov agreed that “DeFi products are more sophisticated in nature than simple ICO tokens, which probably will limit the influx of non-qualified investors.”
Additionally, Ruaridh O’Donnell, the co-founder and director of information systems of Kava — a DeFi lending platform — told Cointelegraph that it is wrong to call what is happening a speculative bubble, as DeFi firms such as Compound are developing new incentive programs to drive user adoption. He clarified for Cointelegraph:
“Much like how Uber, AirBnb, and other tech companies have subsidized the initial supply and demand side of their platforms, we are now seeing decentralized protocols like Kava and Compound do the same to bootstrap early adoption until a sufficient network effect is built.”
Token assets such as COMP are seeing a great amount of speculation due to the growth of their platforms, O’Donnell added, which can cause a localized bubble for COMP in the markets. But this is different from a general market bubble.
On the issue of volatility, Giuseppe Ateniese, a professor at the Stevens Institute of Technology, told Cointelegraph that he can name “hundreds of companies whose stock price behaves with the same volatility [as COMP], particularly during the first days on the market.”
The critical difference here is that the assets are digital. It isn’t like a traditional car loan, where if the borrower defaults, the bank goes after the car seeking repossession. Ateniese continued:
“With DeFi, assets are digital and locked/committed through smart contracts. If done correctly (and this is still a big IF), there is no or little risk for creditors. If I don’t pay the loan back, the digital asset that I used as collateral is taken, and there is nothing I can do about it.”
This is the reason the “interests” being paid on DeFi platforms such as Compound are so high, in Ateniese’s view. For example, if one deposits the stablecoin Tether (USDT) with Compound this week, a 6.75% annualized rate in interest will be earned — at a time when the federal discount rate is 0.25%. “The best part of all is that anyone can be a creditor under these terms. Banks are warned,” according to Ateniese.
“I’m more optimistic about DeFi” than some of the more recent naysayers, Ateniese told Cointelegraph. “I think it’s a game-changer.” As he said recently, “With decentralized finance, there’s no human in the loop, no server, no organization. There’s no bias. […] Once the code has been analyzed and set in stone, it runs, and that’s it. You can rely on it almost 100 percent.”
O’Donnell added to this by saying that “recent events further galvanize [belief] that DeFi is a true use case for crypto.” His firm remains very bullish on DeFi, and he expects the industry will grow further as it opens up to non-Ethereum assets such as Bitcoin, Ripple (XRP) and Binance Coin (BNB).
Meanwhile, the DeFi sector’s market capitalization stands at just over $6.6 billion on June 27, according to DeFi Market Cap. Compared with the $2 billion reported on June 12, there has been a roughly three-fold increase in some two weeks. New asset growth was recently described by Evgeny Yurtaev, the founder of DeFi project Zerion, as “exponential.”
What about the gaming of DeFi tokens and seemingly pointless swapping of crypto coins? Is that a sign of “irrational exuberance” — an indication that the market might be overvalued — and if so, should users be concerned? Regarding this, Greenspan said:
“Most people understand that the golden rule of crypto is not to invest more than you can afford to lose. In the meantime, new economic models are being tested. And that’s pretty exciting.”
DeFi Platform Opyn Launches Put Options On Compound Token
Decentralized finance (DeFi) protocol Compound saw its governance token, COMP, skyrocket in price when it launched last week. Now, decentralized options marketplace Opyn has launched put options on COMP that will provide a safety net of sorts by helping holders mitigate some of the risk should COMP’s fortunes take a turn for the worse in the next few days.
“We’re excited to launch @compoundfinance COMP put options! You can protect yourself if COMP falls to $150 or lower before July 3rd,” Opyn’s official handle tweeted early Friday. Several hours later, Universal Market Access (UMA) announced it is creating the ability to synthetically short COMP on its decentralized platform. Opyn closed on over $2 million in funding this past week.
A put option is a derivative contract that gives purchaser the right but not the obligation to sell the underlying instrument at a predetermined price on or before a specific date. Meanwhile, call options represent a right to buy, With options, traders can make bearish or bullish bets at various price levels called strikes that expire in different months.
Opyn is offering a put option on COMP at the strike price of $150, which will expire on July 3.
How It Works
A put option with a $150 strike can be bought by paying a U.S. dollar-denominated premium, currently $3.76. In return, the purchaser will receive oTokens, which represent the right to sell COMP on or before expiry at $150. oTokens can be bought and sold on an exchange like Uniswap at any time before expiry.
Meanwhile, the option seller offering insurance will deposit 150 USDC, a dollar-backed stablecoin, as collateral to ensure there is no liquidation risk.
The put option on COMP is an American-styled option, meaning the buyer can exercise their right to sell COMP at $150 anytime before July 3. European options can be exercised only on expiry.
While exercising the put option, the purchaser will send oTokens back to Opyn along with COMP (because oToken is the “right to sell COMP at 150”) and will receive 150 USDC in return.
As such, one could say the put option essentially represents the right to sell COMP and buy USDC.
In such an instance, the max loss for the buyer is the premium paid, which is the maximum money the seller can make. “Keep the entirety of your premium as well as your collateral as long as the asset stays above the strike price until expiry,” Opyn tweeted.
Even if COMP’s price drops to single digits or even zero, the holder of the put option would still be able to sell COMP at $150.
“Opyn’s put option can be used by traders who do not hold COMP but want to speculate on the DeFi token,” Anton Cheng, developer at Opyn.
A trader with a bearish view on COMP can just buy put options at the available strike price of $150. If COMP drops, the oTokens will appreciate in value and traders can sell them on Uniswap.
At press time, COMP is trading at $250, according to Opyn.co. The governance token went live for trading on June 18 and traded near $80 on the first day. In the following three days, its price surged by 500% to $380, triggering a frenzy in the DeFi space.
Such strong rallies are often followed by sudden price pullbacks. Savvy investors, therefore, may buy the newly launched put option on COMP to cap downside risks.
Compound’s COMP Token Takes DeFi by Storm, Now Has To Hold Top Spot
Compound’s COMP token has been wildly successful in the initial period since launching. What’s behind it, and is it sustainable?
When Compound launched its governance token, COMP, on June 16, few in the crypto space could have predicted how rapidly it would rise to the top. As Cointelegraph reported at the time, it only took a single day of trading for COMP to become the leader of the decentralized finance rankings. It was a historic moment for any fans of DeFi, marking the first time that Maker (MKR) had been toppled from its throne since the DeFi movement began.
News of a Coinbase Pro listing only pushed the price to further heights. But as is inevitably the case with cryptocurrencies, volatility moves in both directions. Only days later, COMP prices fell from highs of $427 to below $250, only to jump 25% after Binance suddenly announced it was listing the token as well. Later, some analysts proposed that the price had been artificially pumped using derivatives.
Regardless, COMP retains the DeFi top spot — at least for now. So, what’s all the fuss about?
What Is Compound?
Compound is a decentralized lending application developed on the Ethereum blockchain. Essentially, anyone holding a supported cryptocurrency can deposit it into a Compound smart contract where it joins a liquidity pool and starts generating interest.
The interest comes from other users that borrow funds and pay interest for the loans. However, there’s a twist. So far, this sounds like the same as what a bank does with money. Only with a bank, once the funds are withdrawn, they stop earning interest.
With Compound, when funds are deposited, the protocol issues the tokens, called cTokens. So, if Ether (ETH) is deposited into Compound, an equivalent value of cETH will be received. The cETH can then be used as collateral for a loan, meaning that, effectively, the funds can be spent while they’re earning interest.
The interest earned is determined by Compound’s underlying smart contracts based on supply and demand. So, if there’s a large number of people borrowing a particular asset, the smart contract will increase the interest rate to attract lenders and make it more expensive to get a loan. Compound currently supports nine assets issued on Ethereum, including Tether (USDT), Dai, Wrapped Bitcoin (WBTC) and Basic Attention Token (BAT).
Despite Compound’s popularity in the DeFi space, it has already attracted some criticism. Ameen Soleimani, the CEO of SpankChain, wrote a now-famous post on Medium in which he highlighted central points of failure in Compound’s protocol.
Although the Compound smart contracts have been audited and were found to be secure, like is the case with many DeFi decentralized applications there are only a small number of parties responsible for the wallets that control the deposited assets. As Soleimani pointed out, if a malicious party were to gain control of the keys to those wallets, it could wreak havoc among Compound users.
Compound first appeared in 2017, and it’s not surprising that Coinbase Pro jumped on a DeFi governance token, as it’s worth pointing out that Compound was one of the earliest projects to receive funding from Coinbase Ventures. The funding came from an $8 million seed round in which Andreessen Horowitz, Polychain Capital and Bain Capital Ventures also participated.
As the platform has gained traction, many other applications have integrated Compound into their offerings. Coinbase Custody and Anchorage both support COMP and cTokens. Since the COMP token was released, several other exchanges have jumped to list it, including Binance, FTX and Poloniex.
Why Did A Governance Token Rally?
Compound announced it would start to distribute its Compound Governance Token on June 10, after a community vote. Prices for the token were not available at release, so nobody could have really predicted how it was going to go.
It is fair to say that Compound has always been highly popular in the DeFi space and has attracted a lot of high-profile support. At the moment, the token confers voting rights over matters such as protocol upgrades or including new assets for borrowing and lending on the platform. However, holders may vote to distribute fees or for token buybacks in the future.
But COMP tokens don’t confer any rights to earn interest in the same way that cTokens do. So, why the feeding frenzy at launch? Vadim Koleoshkin, the chief operations officer at Zerion — a DeFi interface provider — believes that the current COMP hype is due to interest in a new type of share equity. Speaking to Cointelegraph, he explained:
“Compound is one of the first Web 3.0 companies that became public, and COMP is cooler than traditional shares because it’s programmable. Tokens do not have yield, but Compound has a chance to become one of the most prominent players in the money market. The ability to participate in the governance of it may, therefore, be valuable.”
However, this doesn’t necessarily mean the price will continue to skyrocket indefinitely. Koleoshkin predicts that volatility will eventually dampen: “With the broader distribution of $COMP tokens and the launch of other trading venues, the market will determine a fair price for it.”
In The Eyes Of Maker?
As the saying goes, a rising tide lifts all ships. Other DeFi DApps have seen similar meteoric rises. When Balancer announced its own governance token, BAL, was live, the price jumped over 230%. Tokens such as Aave’s LEND, the native Ren token and Synthetix’s SNX all boomed in the wake of Compound’s launch. Ethereum miners have been laughing all the way to the bank as gas fees have soared.
All this will be scant consolation to Maker, which even despite the crash in Compound’s value on June 23 continues to occupy second place in the DeFi rankings. What was once DeFi’s flagship DApp had previously sat atop the rest, at some points achieving dominance of 60% over its competitors.
It even held the top spot in the aftermath of March’s Black Thursday crisis, after a market crash liquidated millions in crypto-collateralized debts on the platform. However, Koleoshkin believes that the launch of COMP is only the beginning of a broader shake-up in the DeFi space:
“Right now, we see a lot of new users coming in to explore what DeFi has to offer. From our recent findings, many users see DeFi as a viable alternative to services like Binance and Coinbase. Many more governance and DeFi tokens are going to launch soon, and trading venues like Uniswap, Kyber, and Balancer are ready to trade them.”
With all this incoming action, it may ultimately be the case that another application moves past Compound and Maker to take the DeFi top spot. Whichever way it goes, there’s plenty still to play for in DeFi over the coming months and years.
Andreas Antonopoulos: Use DeFi Contracts For BTC Passive Income
HODLing Bitcoin may pay off eventually, but it means one’s money isn’t working for them now, says Andreas Antonopoulos.
02:18 Andreas Antonopoulos Talks About The Risks of DeFi Lending
Bitcoin educator Andreas Antonopoulos says there are risks behind any current method of earning steady income with one’s Bitcoin holdings, but DeFi offers one of the few ways to do so without “giving your money to other people.”
In a livestream Q&A on Antonopoulos’ YouTube channel on June 27, he said decentralized finance (DeFi) contracts were one way for Bitcoin (BTC) owners to generate passive income without relinquishing custody of their coins. “Passive income” refers to money earned using methods that require little-to-no effort.
According to Antonopoulos, investors could convert their BTC into Ethereum (ETH) or a stablecoin like Dai (DAI), then lend it out on a platform where the token can earn interest. However, he said carrying out such trades on Ethereum-based platforms was “quite risky” in terms of security, smart contracts with bugs, and the platform itself:
“Ethereum may have problems. It may have bugs. The consensus algorithm may have failures. You may have increases in the gas price, which leads to other cascade problems. And all of those things can cause you to lose some or all of your invested capital.”
Lending and borrowing crypto can be a risky bet due to the high volatility of digital currencies, with a large number of crypto-backed loans used for margin trading. However, the volume of these loans reached $8 billion last year, and may continue to attract investors.
HODLing Not The Only Way To Earn
Though Antonopoulos mentioned other methods for getting investors’ coins to work for them, nearly every way to do so meant relying on a custodial exchange. The Bitcoin educator said such investments carried the risk of theft or mismanagement.
Bitcoin HODLers, on the other hand, do not earn dividends or interest on their investments — or anything — until they finally decide to cash out. Antonopoulos says HODLers hope for appreciation, but “what goes up, can come down.”
The Bitcoin educator says the same is true for crypto day traders: “You can pull your Bitcoin out and convert it, buy 1,000 altcoins, and then watch them crash by 98%.”
Antonopoulos Not The Only DeFi Advocate
Others in the crypto community have commented on creating passive income through DeFi lending. Cointelegraph reported in March that OKEx Director of Financial Markets Lennix Lai said: “The combination of cryptocurrency and DeFi creates an alternative way for users to earn passive interest that was not possible before.”
Ethereum 2.0’s release later this year may offer users the opportunity to earn passive income through staking pools.
Decentralized Exchange Volumes Up 70% In June, Pass $1.5B
June trading volume on decentralized exchanges set a record high of $1.52 billion, up 70% from May, according to data from Dune Analytics.
This double-digit percentage growth is simply “the continuation of a trend dating back to the end of ,” Jack Purdy, decentralized finance analyst at Messari, told CoinDesk.
Curve and Uniswap control the largest amount of traded volume, recording $350 million and $446 million, respectively, in June. Both protocols are automated market makers that can also function as decentralized exchanges. Balancer, a similar platform, recorded $93 million in traded volume, up 2,460% from $3.6 million in May.
Significant growth can be partially attributed to the “proliferation of automated market makers,” according to Purdy. As a result, these markets offer greater liquidity for “the tail end of crypto assets” and even occasionally less order slippage than centralized exchanges, Purdy said.
In June, automated market makers grew by more than 170% while pure decentralized exchange platforms grew by only 10%.
Too much growth too quickly could be cause for concern, however, as decentralized exchanges still need time for continued development and stress testing.
Recent increases in trading volume are “starting to become a bit worrisome,” Purdy said, adding that an “unnatural rush to deposit assets” into these exchanges is fueled, in part, by the “liquidity mining phenomenon.”
Since January, aggregate decentralized exchange volumes, including automated market makers, have more than quadrupled from $276 million to $1.52 billion.
Even though popular decentralized finance protocols may be “highly audited and deemed safe,” plenty of potential attack vectors still exist, Purdy said. A decentralized liquidity provider, Balancer, lost $500,000 in a sophisticated attack Monday, for example.
The number and varieties of potential attacks only increase as decentralized finance protocols become more intertwined, Purdy said.
DeFi Insurer Nexus Mutual Maxed Out by Yield-Farming Boom
Nexus Mutual is maxed out covering the risks associated with decentralized finance (DeFi) platforms.
“Our product has honestly seen massive interest since yield farming kicked off,” Nexus Mutual founder Hugh Karp told CoinDesk in an email. “With potential yields being so lucrative many users are looking to protect themselves against the risk of smart contract failure.”
Nexus Mutual provides a way to hedge against the risk posed by smart contracts, with policies that pay out against a failure in the underlying software of a DeFi product within a given time frame.
It made its first payments earlier this year following the attacks involving flash-loan provider bZx. The Nexus Mutual risk pool already doubled over the last quarter, but the craze following the release of Compound Finance’s governance token on June 15 has notched it up even further.
“In particular, there is big demand coming from hedge funds and more professional investors for our product, they want multi-millions of cover. As a result, we’ve hit our current capacity limits on the key yield-farming protocols such as Compound, Balancer and Curve,” Karp told CoinDesk.
On Nexus Mutual Tracker, a data site made by 1confirmation partner Richard Chen, Curve is at the top, with active per contract sitting at $695,000. Compound and Balancer are a close second and third, respectively, with $651,000 and $619,000 of cover.
Those are the most well-covered contracts on Nexus now, but Balancer is only slightly ahead of payments system Flexa.
Nexus is run as a mutual company by holders of the NXM token. They have set limits of $630,000 in coverage on each protocol. That amount is based on how much is on hand to pay out claims. The token is designed to recruit more capital when it’s needed, however, so they may be able to take on more policies soon.
Nexus currently has $5 million on hand to cover claims, up $1 million since earlier this month. It’s worth noting that there’s no need for users of Nexus to show a loss to use Nexus.
They only need to take out a policy that the smart contract might break or be exploited to get paid out.
This is similar to Opyn, which allows users to take out short positions against various tokens dramatically losing value, whether they hold the token or not.
Karp wrote, “Yield farming is certainly attractive due to the outsized returns, but it does come with increased risk; leverage and smart contract risk can be dangerous, so be careful out there.”
Ethereum DeFi Broke Records In June, But Other Categories Are Suffering
Ethereum’s 2020 DeFi boom came at the cost of its gaming ecosystem.
Results for the second quarter of 2020 show tremendous growth for decentralized applications across all ecosystems, primarily spearheaded by Ethereum (ETH) decentralized finance, or DeFi.
Decentralized exchanges were at the frontlines of the rise as Compound token mining activity trickled down to on-chain swapping solutions.
According to Our Network, Curve was one of the biggest beneficiaries of yield farming as it helped users switch between different stablecoins to maximize yield.
Curve is an automated money market that only supports swaps between different types of stablecoins and wrapped tokens. This limitation allows Curve to provide competitive slippage and fees for exchanging assets.
Deposits on Curve rose almost three-fold in June, while daily volume reached peaks of $60 million — 30 times more than its previous average. Demand for USDT pairs was the highest, capturing more than 58.5% of the total volume. This is due to USDT having one of the most significant COMP yields for an extended period of time.
Uniswap also benefited from the COMP craze, with monthly volume doubling in June.
Kyber and 0x had more modest performances: despite posting fresh monthly highs, the project’s growth was in line with the rest of the year.
Other chains benefiting too
According to DappRadar’s Q2 report, the dominance of DeFi indirectly led to the decline of gaming activity. Over $8 billion was transacted on DeFi platforms in Q2, which led to gas prices soaring exponentially.
Ethereum’s vibrant gaming DApp ecosystem suffered as fees came to represent a significant portion of each transaction. DappRadar reported a staggering 79% decline of gaming-related activity on-chain over the previous quarter.
EOS appears to be the main recipient of Ethereum’s loss as its gaming transaction volume rose by about 80% since the previous quarter. While this is positive news for the platform, it still hasn’t fully recovered from the damage caused by the EIDOS airdrop in late 2019. Volumes remain well below the highs of Q2 2019.
Finally, Tron (TRX) saw growth in its DeFi ecosystem after porting several Ethereum projects on its chain. In addition to the previously-launched clone of Single Collateral Dai, a platform named Oikos.cash recreated both Synthetix and Uniswap on Tron. Nevertheless, total volume for all Q2 is just $15 million. The majority of Tron’s activity remains in the gambling and “high-risk” categories.
Coinbase Custody To Support Secure Cardano Staking This Year
Cardano holders will soon be able to stake tokens securely at Coinbase Custody.
At the Cardano Virtual Summit Friday, chief developer house IOHK announced it had signed an agreement with Coinbase Custody.
From Q4 2020, users will be able to stake their ADA tokens from inside Coinbase’s cold storage.
In proof-of-stake blockchains, like Cardano, blocks are verified by token holders (rather than miners as with blockchains like Bitcoin), who receive rewards in return.
Cardano’s staking protocol, Shelley, is expected to come online later this month with staking rewards beginning in mid-August.
Sam McIngvale, Coinbase Custody’s head of product said their regulated product would help projects, like Cardano, find more mainstream acceptance.
Tensions between the Bitcoin and Ethereum tribes have been stirred by a trend that outsiders might see as a sign of harmony.
Throughout June, the amount of tokenized bitcoin on Ethereum, the bulk of it in WBTC, a special ERC2 token known as “wrapped bitcoin,” soared from 5,200 BTC to 11,682 BTC – now worth around $108 million – according to btconethereum.com.
As is their wont, each faction described the growth of WBTC tokens, whose value is pegged one-to-one against a locked-up reserve of actual bitcoin, as proof of their coin’s superiority over the other.
The Ethereum crowd said it showed that even BTC “hodlers” believe Ethereum-based applications provide a better off-chain transaction experience than platforms built on Bitcoin, such as Lightning or Blockstream’s Liquid. Bitcoiners, by contrast, took it as confirmation that people place greater value in the oldest, most valuable crypto asset, than in Ethereum’s ether token.
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Beneath the rivalry on Crypto Twitter, the bitcoin-on-Ethereum trend says more about complementarity than competition.
The data simultaneously highlight that bitcoin is the crypto universe’s reserve asset and that Ethereum’s burgeoning “DeFi” ecosystem is crypto’s go-to platform for generating credit and facilitating fluid exchange.
Real World Parallels
Though it’s too early to know who the eventual winners will be, I believe this trend captures the early beginnings of a new, decentralized global financial system. So, to describe it, an analogy for the existing one is useful: bitcoin is the dollar, and Ethereum is SWIFT, the international network that coordinates cross-border payments among banks.
(Since Ethereum is trying to do much more than payments, we could also cite a number of other organizations in this analogy, such as the International Swaps and Derivatives Association (ISDA) or the Depository Trust and Clearing Corporation (DTCC).)
So, let’s dismiss claims like those of Ethhub.io co-founder Anthony Sassano. He argued that because bitcoin token transactions on Ethereum deny miners fees they would otherwise receive on the bitcoin chain, bitcoin is becoming a “second-class citizen” to ether.
You’d hardly expect people in countries where dollars are preferred to the local currency to think of the former as second class. And just as the U.S. benefits from overseas demand for dollars – via seignorage or interest-free loans – bitcoin holders benefit from its sought-after liquidity and collateral value in the Ethereum ecosystem, where it lets them extract premium interest.
Still, to declare bitcoin the winner based on its appeal as a reserve asset is to compare apples to oranges. Ether is increasingly viewed not as a payment or store-of-value currency but for what it was intended: as a commodity that fuels the decentralized computing network orchestrating its smart contracts.
That network now sustains its financial system, a decentralized microcosm of the massive traditional one. It takes tokenized versions of the underlying currencies that users most value (whether bitcoin or fiat) and provides disintermediated mechanisms for lending or borrowing them or for creating decentralized derivative or insurance contracts.
What’s emerging, albeit in a form too volatile for traditional institutions, is a multifaceted, market for managing and trading in risk.
This system is being fueled by a global innovation and development pool bigger than Bitcoin’s. As of June last year, there were 1,243 full-time developers working on Ethereum compared with 319 working on Bitcoin Core, according to a report by Electric Capital.
While that work is spread across multiple projects, the size of its community gives Ethereum the advantage of network effects.
Whether DeFi can shed its Wild West feel and mature sufficiently for mainstream adoption, the code and ideas generated by these engineers are laying the foundation for whatever regulated or unregulated blockchain-based finance models emerge in the future.
Complexity Vs Simplicity
There are legitimate concerns about security on Ethereum. With such a complex system, and so many different programs running on it, the attack surface is large.
And given the challenges the community faces in migrating to Ethereum 2.0, including a new proof-of-stake consensus mechanism and a sharding solution for scaling transactions, it’s still not assured it will ever be ready for prime time.
Indeed, the relative lack of complexity is one reason why many feel more comfortable with Bitcoin Core’s security. Bitcoin is a one-trick pony, but it does that trick – keeping track of unspent transaction outputs, or UTXOs – very well and very securely. Its proven security is a key reason why bitcoin is crypto’s reserve asset.
Base-layer security is also why some developers are building “Layer 2” smart contract protocols on Bitcoin. It’s harder to build on than Ethereum, but solutions are evolving – one from Rootstock, for example, and more recently, from RGB.
And while Ethereum fans crow about there being 12 times more wrapped bitcoin on their platform than the mere $9 million locked in the Lightning Network’s payment channels, the latter is making inroads in developing nations as a payment network for small, low-cost bitcoin transactions.
Unlike WBTC, which requires a professional custodian to hold the original locked bitcoin, Lightning users need not rely on a third party to open up a channel. It’s arguably more decentralized.
At the same time, the inclusion of bitcoin in Ethereum smart contracts is inherently strengthening the DeFi system.
Decentralized exchanges (DEXs), which allow peer-to-peer crypto trading without centralized exchange (CEX) taking custody of your assets, have integrated WBTC into their markets to boost the liquidity needed to make them viable.
Sure enough, DEX trading volumes leapt 70% to record highs in June. (It helped, too, that June saw a surge in “yield farming” operations, a complicated new DeFi speculative activity that’s easier to do if you maintain control of your assets while trading.)
Meanwhile, the recent move by leading DeFi platform MakerDAO to include WBTC in its accepted collateral has meant it has a bigger pool of value to generate loans against.
This expansion in DeFi’s user base and market offerings is in itself a boost to security. That’s not just because more developers means more code vulnerabilities are discovered and fixed.
It’s because the combinations of investors’ short and long positions, and of insurance and derivative products, will ultimately get closer to Nassim Taleb’s ideal of an “antifragile” system.
That’s not to say there aren’t risks in DeFi. Many are worried that the frenzy around speculative activities such as “yield farming” and interconnected leverage could set off a systemic crisis. If that happens, maybe Bitcoin can offer an alternative, more stable architecture for it.
Either way, ideas to improve DeFi are coming all the time – whether for better system-wide data or for a more trustworthy legal framework. Out of this hurly burly, something transformative will emerge.
Whether it’s dominated by Ethereum or spread across different blockchains, the end result will show more cross-protocol synergy than the chains’ warring communities would suggest.
Gold “To The Moon”
Bitcoin might be a reserve asset for the crypto community but its recent price trajectory, with gains and losses tracking equities, suggest the non-crypto “normies” don’t (yet) see it that way.
Given the COVID-19 crisis’s extreme test of the global financial system and central banks’ massive “quantitative easing” response to it, that price performance poses a challenge to those of us who see bitcoin’s core use case as an internet era hedge against centralized monetary instability.
Far from complying with that “digital gold” narrative, bitcoin has performed like any other “risk-off” asset. Meanwhile, actual gold has shaken off its own early-crisis stock market correlation to chart an upward course.
While bitcoin has repeatedly failed to sustainably break through $10,000, bullion has rallied sharply to close in on $1,800, levels it hasn’t seen since September 2012. Some analysts are predicting it will breach its all-time intraday high of $1,917, hit in the aftermath of the last global financial crisis in 2011.
To add insult to injury, one Forbes contributor even stole from the crypto lexicon to describe the state of play, telling his readers that gold prices are “soaring to the moon.”
Two charts below show the divergent fortunes of these two would-be safe havens. Throughout 2019, bitcoin seems far less correlated with the S&P 500 stock index than gold is. Come the collapse in March 2020, they seem to swap circumstances.
There Are More DAI On Compound Now Than There Are DAI In The World
We might be entering into the era of genetically modified yield farming. Or maybe decentralized finance (DeFi) just doesn’t make sense anymore.
There are currently far more DAI in supply on Compound than there are DAI in the world, at least according to the numbers reported by Compound’s website. Assuming that nothing has gone awry there, the numbers seem impossible. But they might not be.
Liquidity on Compound is shifting dramatically between assets as new rules for distribution of its governance token, COMP, take effect.
Compound’s website reports a gross supply of 401 million DAI right now even though there are only 148 million DAI in existence, according to DAI Stats.
The supply of DAI on Compound has skyrocketed from $42 million Wednesday.
The most reasonable explanation for this is that Compound counts each deposit of DAI as additional gross supply, even if that DAI was just borrowed and re-deposited. So imagine there were 100 DAI and a user deposited 200 USDC. They could then borrow all that DAI and deposit again. Many users are probably running a few wallets to make this work more easily.
As Electric Capital’s Ken Deeter put it in an email to CoinDesk, “Note that this is actually what banks do with USD as well. If I deposit $100, and $90 gets lent out, someone gets paid with that $90 and they deposit it in the bank. Now there’s $190 in the bank even though there was only $100 to start with.”
At about 21:00 UTC on Thursday, Instadapp put out the message that it was time to move deposits from USDT to DAI in order to maximize yields and it seems like users took note.
As we previously reported, the addition of COMP yields makes these machinations very lucrative.
The price of COMP is $178.80, as of this writing.
A rules change went into effect Thursday that tweaked the incentives for those looking to mine new COMP.
Previously, the rules had favored the basic attention token (BAT) market because it had the highest interest rates after massive deposits into its liquidity pools.
The rules now only count total borrowed and total deposit, ignoring interest rates. So there’s no longer incentive to game a high rate with a risky cryptocurrency.
The total supply to Compound has gone from $320 to roughly $80, though yields on BAT remain strong, at 5.4%.
At 7%, DAI has by far the strongest yield of any token on Compound right now, making it attractive to buy on the market and supply. With Tuesday’s change to the protocol – which went into effect today – all that counts for COMP earnings going forward are the total amount borrowed and lent.
Yield farmers will look for the best risk-adjusted return and since DAI has the highest yield with low volatility, it’s a very clear bet.
This Was Exactly What The MakerDAO Community Was Worried About Earlier This Week. Cyrus Younessi, From MakerDAO’s Risk Team, Wrote:
“There is a chance (likelihood, even) that we see an unprecedented demand for Dai. Much of the natural supply for Dai could also be locked up in COMP farming, thinning out sell-side order books.”
As forum user “Maker Man” put it today in the MakerDAO chat, “Remember this whole COMP thing is a recycling issue – this is not necessarily draining DAI liquidity though it will tend to drive a siphon of it if it continues.”
‘Everything Will Move To Confidential DeFi‘ Beam’s CEO Says
In the time of DeFi boom, how will Beam’s confidential DeFi stand different from others? Beam CEO Alexander Zaidelson spoke to Cointelegraph.
On June 29th, major privacy cryptocurrency Beam underwent a hard fork to enable “Confidential DeFi” on Beam. In the time of the DeFi boom, how will Beam’s confidential DeFi be different from other DeFi such as COMP and MakerDao? Alexander Zaidelson, the CEO of Beam, spoke to Cointelegraph about its prospects.
The Beam hard fork activated the support of confidential assets, or Beam CA, which enabled independent tokens to be issued on the Beam blockchain. It is a key component of the confidential DeFi, benefitting from the confidentiality and scalability features of Beam.
Zaidelson explained that confidential DeFi is “an ecosystem for financial services that have full confidentiality, great usability and also opt-in auditability.”
Zaidelson acknowledged the merit of other DeFi services like Compound and Maker as “solid financial instruments”. Indeed he dismissed a comparison between the recent DeFi boom and the ICO boom in 2017, and described ICOs as “a flawed concept where people believed in invaded promises and lost their money.”
But He Also Pointed Out The Difference From Beam’s Defi As Follows:
“They are built on Ethereum, which is an antithesis of privacy. Beam Confidential DeFi will offer evolved functionality plus financial privacy and all that with great usability and ability to audit transactions”
When asked if Beam’s DeFi targets audiences different from those of COMP and Maker, he answered that “everyone needs privacy, so eventually, everything will move to confidential DeFi.”
Compound’s governance token COMP has been wildly successful in the initial period since launching. It only took a single day of trading for COMP to dethrone Maker (MKR) from the leader of the decentralized finance rankings.
DeFi Offers Potential Investment Opportunities Said HyperChain Capital
HyperChain Capital CEO says DeFi provides potential growth and investment opportunities for the digital assets management firm.
Decentralized finance, or DeFi, offers potential growth opportunities said the chief executive of digital assets management company HyperChain Capital.
HyperChain CEO Stelian Balta said DeFi “has a huge opportunity to grow” and that digital currencies and blockchains are something the company continues to look on with interest.
“I believe DeFi space has a huge opportunity to grow and one of the leaders in DeFi space, Kyber Network, just crossed $1 billion dollars in trading volume and project market cap is worth more than $300 million dollars, which I think is way undervalued. Also, we think the best platforms for creating blockchain games are platforms using EOSIO inspired technologies, such as Wax.io.
Recently Wax added Topps virtual goods and Topps is the most prestigious producer of trading cards and collectibles in the world for MLB, Star Wars, WWE and Garbage Pail Kids. We are firm believers in the potential of DeFi ecosystem and blockchain games and the proof is our investments we did and we continue to do.”
Balta noted getting an “inflation hedge” like Bitcoin in a portfolio can mitigate risk especially as currencies are on the brink of negative rates.
He added he is “bullish on the crypto market long term, especially in DeFi and that’s the reason why we are continuing to invest, to improve and build in the crypto ecosystem.”
Singapore-based HyperChain focuses on investments in blockchain-based projects and decentralized protocols. It invested more than $2 million in Fantom and is one of the biggest holders of Tezos tokens.
As previously reported by Cointelegraph, DeFi for Kyber has seen multiple projects in the past months, including privacy blockchain Incognito which released a privacy feature within the Kyber Network.
Fake Tokens on Uniswap Are Trying To Cash In On DeFi Hype
Uniswap appears to be plagued with scam tokens claiming affiliation with popular DeFi projects.
Scam tokens are a growing problem on the decentralized exchange and liquidity pool Uniswap — owing to the protocol’s open listing policy.
In recent days warnings have been issued about scam tokens targeting four of the most buzz-worthy decentralized finance (DeFi) projects including Curve Finance, 1inchExchange, Tornado.Cash, and dYdX.
With any token able to be listed on the platform’s drop-down menu simply by making a GitHub request, the platform’s users are increasingly calling for more stringent vetting to be introduced.
Open Listing Policy Leads To Scam Tokens
Decentralized derivatives project Opium took to Twitter on July 7 to warn users that a scam token called Opium and trading under the ticker OPM had been listed on Uniswap despite the project not having a native token.
The same day the Defiprime Twitter account noted a ‘DYDX’ token pool purporting association with the similarly tokenless DeFi protocol dYdX, along with a fake ‘Uniswap Community Token.’
A day earlier Tornado.Cash had reported that scammers were selling a fraudulent ‘TC’ token claiming affiliation to the project. Curve Finance and 1inch.Exchange reported fake coins impersonating their yet-to-be-released native tokens on July 5 and July 4 respectively.
A similar scam token impersonating Balancer Labs’ then-forthcoming BAL was also identified last month.
Uniswap Attracts Liquidity
Since its ‘V2’ overhaul in May, Uniswap has emerged as a cornerstone of the nascent DeFi ecosystem, with data published by Dune Analytics indicating that Uniswap comprises DeFi’s top pool by total users with 92,000.
V2 also preceded a dramatic spike in Uniswap volume, with trade activity on the platform exceeding $20 million on July 2 — roughly six weeks after Uniswap’s volume broke above $2 million for the first time.
Security Is The Biggest Challenge For DeFi’s Continued Growth, Says Exec
The founder of blockchain security company Quantstamp, Richard Ma, said security is the biggest challenge for DeFi’s growth.
Richard Ma, the CEO and co-founder of the blockchain security startup Quantstamp, explained that decentralized finance has the potential to change our financial ecosystem but security remains a huge challenge.
“We think security is very crucial for DeFi’s growth,” he said at the Unitize digital conference today. Ma noted the several DeFi hacks that occurred so far in 2020, stating that $26 million worth of funds were stolen from DeFi projects this year alone.
Rising Interest In DeFi
The DeFi ecosystem grew almost three fold from $700 million in December 2019 to $2 billion at present. Reflecting on this growth, Ma said:
“It indicates a desire for an alternative financial system because as you see with COVID-19, banks are printing more and more money and interest rates that are available in the traditional financial system are quite low. So, people are looking for better options.”
He specifically noted the expansion of DeFi project Compound and said that almost $700 million has flown into DeFi projects to gain yields that are far more compared than those offered by the traditional financial system.
But Security Issues Persist
According to Ma, while DeFi projects promise financial inclusion, better interest rates, and reduced costs, many are still lacking on the security front, with critical vulnerabilities for users’ funds.
Ma said that one of the largest attack vectors is through undercollateralized loans where hackers inflate the values of some assets temporarily and deposit them to a lending protocol and then borrow a different asset using the manipulated price.
As these projects are decentralized and there’s no way to track and restore illegal transactions, “it’s crucial to have proper security ahead of time.” Apart from security audits, focusing on live security monitoring, increased transparency, and insurance will be the way forward to increasing DeFi’s potential, Ma concluded.
Nearly 6% of Kyber’s Token Supply Staked In One Day
Over $16 million worth of KNC have been staked within 24 hours of Kyber launching the service.
$16.7 million worth of decentralized finance (DeFi) liquidity protocol Kyber Network’s KNC token have been locked up in staking within 24 hours of the service’s launch.
The milestone was noted by Kyber co-founder Loi Luu, who tweeted to announce that nearly 10.5 million KNC had already been staked.
Hype for the launch drove a major rally over the months leading up to the staking commencement, with the price of KNC more than tripling against the dollar since late-April. However, KNC has posted a 10% price retracement since topping out roughly one week ago.
Kyber’s network also saw a surge in activity ahead of staking’s launch, with a record number of daily KNC transactions being executed last week.
With nearly 182 million KNC in circulation, 5.7% of the market’s total supply has been locked in staking. Kyber currently offers staking rewards of 0.05%, according to stakingrewards.com.
The increasing popularity of staking as a source of passive income has seen enormous shares of crypto assets’ circulating supply locked up, with more than half of the circulating supply for nine projects being designated towards staking.
More than 80% of Kava (KAVA) and Tezos (XTZ) are being staked, with Synthetix Network (SNX) and Cosmos (ATOM) seeing over 70%. More than 49% of the supply of at least 11 projects are locked in staking.
How Did Basic Attention Token (BAT) Become The Most Used DeFi Token?
As Compound conquered the DeFi space and its COMP token rallied, Basic Attention Token saw an abnormal surge in its trading volume and price.
According to recent research from blockchain analytics firm Flipside Crypto, Brave’s Basic Attention Token (BAT) became the most used ERC-20 token in the decentralized finance (DeFi) sector from June 19 to July 2. According to Dapp.com, “there was a transaction volume of $931 million generated from BAT token, more than the combined volume of Ether and Dai”.
BAT is the token used to incentivize and reward advertisement viewing by Brave Browser users. The idea behind blocking advertisements is to encourage ad makers to share revenue with the end users who watch ads and share their personal data, which oftentimes they are unaware is being tracked and monetized.
While Brave may be one of the leaders in the blockchain advertising space and BAT is frequently traded by crypto investors, the most recent surge in price and trading volume was abnormal.
What Was Behind The Bat Pump?
According to Flipside Crypto, the recent increase in BAT volume and price was connected to developments in another DeFi project called Compound.
For the past few weeks Compound has been the center of attention in the DeFi space and the recent release of its COMP token caused a stir as it rallied 233% in its first week of trading. As reported by Cointelegraph, COMP has also become the largest DeFi protocol in terms of total value locked.
Compound’s reward mechanism allows users to borrow tokens by depositing an equivalent amount of another token as collateral for said loan. At the same time, the lenders earn interest on the tokens locked in exchange for supplying liquidity to the Compound lending ecosystem.
The protocol also provides additional COMP rewards to participants based on the amount of interest they earned or paid for lending or borrowing.
According to data from Flipside Crypto, this was the reason for the surge in activity because tokens like BAT have a high interest rate of 30% for lenders and borrowers.
The Dangers Of Inorganic Activity
Although the spike in BAT usage does not seem to pose any immediate threat to the overall DeFi ecosystem, there are a few easily-overlooked consequences to such accentuated inorganic activity.
The surge in activity is created because users can simply borrow a token and resupply it to the lending protocol to earn COMP tokens for performing both roles.
The Ethereum network is already facing serious congestion and scalability issues with its surging activity on stablecoin and DeFi protocols.
Inorganic activity such as that seen with BAT siphons necessary resources from users who are interacting with the smart contracts in a more ‘legitimate’ way.
Flipside Crypto noted that this sort of activity can also cause serious liquidity issues for tokens with a relatively-small market cap and trading volume. In the case of BAT, around 82% of its supply was locked in Compound during this period.
This unusual activity came to a stop when Compound changed the way its bonus COMP tokens are distributed on July 2. Users are now rewarded on the basis of the dollar value of assets borrowed, rather than the interest earned which has led users to shift to stablecoins like DAI.
However, the most recent pump in BAT’s volume and spot price shows just how fragile the DeFi ecosystem still is, and also how easily it can be intentionally or unintentionally manipulated.
DApps Need To Nail Usability To Move From Crypto Niche To Mainstream
Yield farming is driving a boom in DApp and DeFi use, but user experience improvements will be key for future adoption in the next five years.
From CryptoKitties to Compound, decentralized applications and decentralized finance have become increasingly popular in the blockchain space, but the sector has gone through a fair share of teething problems since DApps first appeared in 2017.
DApps were popularized around the same time that Bitcoin (BTC) experienced a monumental surge in value toward the end of 2017. Ethereum quickly established itself as the protocol of choice for blockchain developers to build and launch DApps, and the success of projects such as CryptoKitties proved that people were actively looking to get involved in the space. CryptoKitties was so popular at the time that the Ethereum network took major strain due to the influx of users and subsequent transactions for the crypto collectibles.
In the three years since those lofty highs and public hype, there hasn’t quite been the same level of fanfare around DApps. This is understandable given the sheer amount of public interest that went into the cryptocurrency and blockchain space in 2017, but it doesn’t mean that the DApp space has waned.
In fact, the latest market report released by Dapp.com shows that the overall user base of DApps and DeFi platforms on Ethereum increased by nearly 100% in the second quarter of this year. 1,258,527 active DApp users is an all-time high for the Ethereum ecosystem.
It would be remiss not to mention that Ethereum is not the only blockchain protocol powering decentralized applications: EOS, Tron, Neo and Steem sit alongside Ethereum as the biggest blockchain-based platforms that allow the development and running of DApps, according to Dapp.com. All of these platforms have an important role to play in the proliferation and continual development of decentralized applications, as more companies and developers begin to explore the possibilities of the technology.
Positive Trend For DApp Use
Cointelegraph reached out to Dapp.com to get an accurate set of data on the number of DApps and their users since platforms such as Ethereum allowed for their development. Kyle Lu, CEO of Dapp.com, shared data and charts that show the trend of DApps being deployed on Ethereum alongside the number of users: “You could see that it is a good trend of usage climbing as more dapps were built and more users are engaging.”
The cryptocurrency and blockchain space has gone through plenty of change since 2017, and a number of factors had an effect on the development and proliferation of DApps. Lu believes that new use cases by businesses built on the technology is a major reason for the continuous uptick of users:
“We’ve been monitoring the whole DApp market since 2017. A main reason driving interest and usage of DApps is innovation of business models — all the ’hype’ in the DApp area is driven by businesses and products delivered in a way that people haven’t seen before.”
Lu highlighted a number of projects that have legitimized DApps and driven interest in their use and development. In the fourth quarter of 2017, Lu identified CryptoKitties as a “unique digital asset put on blockchain for the first time.” In 2018, Blockchain-based games that use NFTs and offer play-to-earn features were a big driver of interest. He also highlighted Fomo3D, a “transparent ponzi scheme” built on blockchain, as well as TRONbet (now known as WINk), which is a blockchain-based gambling platform with transaction mining.
Jon Jordan, communications director at DappRadar, told Cointelegraph that the boom in interest in 2017 was driven by a peak in cryptocurrency market values across the board. CryptoKitties was once again recognized as a factor, in addition to the launch of decentralized exchanges such as Idex and ForkDelta. The emergence of platforms such as Tron and EOS also played a big part in the development of the ecosystem.
But there was also a downside for Jordan, as according to him, most DApps “were quickly thrown together to make a buck, and most are now inactive.” He added: “The drop in crypto prices in late 2018 also had an impact across all dapp developers and resulted in many underfunded teams dropping out of the space.” According to Jordan, 2019 was the year for gambling DApps on Tron and EOS, while DeFi applications began to gain traction later in the year:
“More importantly on Ethereum mid-to-late 2019 was the stage at which DeFi dapps — notably MakerDAO, Uniswap, Kyber etc — started to gain traction. By the time MakerDAO relaunched DAI with multi-collateralization in November, most of the building blocks were in place for what we now see — a vibrant DeFi ecosystem that is attracting billions of dollars of value through novel interactions between dapps.”
Yield Farming Driving 2020 Fanfare
DeFi has become increasingly popular in 2020 due to users trying to maximize yield farming, as Lu and a number of other experts highlighted to Cointelegraph. The Dapp.com CEO directly attributed the second-quarter spike in users to yield farming and an increase in users on the Compound decentralized lending platform: “Yield farming has created a strong boost for Ethereum token holders to stake their assets in DeFi dapps for interest return.”
Jordan echoed Lu’s comments that yield farming is a major reason for the boom in users in the second quarter, unpacking the phenomenon in a conversation with Cointelegraph and giving his opinion on what is drawing so many users to the DApp ecosystem:
“During Q2, usage has clearly been driven by the ability to generate a lot of value by the Yield Farming of new tokens such as Compound’s COMP token. […] It’s no surprise that a lot more people are now using Compound because this is effectively free money being given away when you use it. Compound usage in June was up 4x compared to April.”
Vadim Koleoshkin, co-founder of DeFI service provider Zerion, believes that yield farming may have drawn in a swathe of new users, but the utility of DApps and DeFi platforms has led to retention of these users:
“Yield farming in DeFi attracted a lot of users. A large portion of the new users came for the yield but ended up staying for the convenience in managing their money in a decentralized manner. There are also a few games and gambling websites with a large number of users. Data, privacy concerns, and lack of access to financial services worldwide will drive the adoption of a new type of apps built on the decentralized stack.”
Improved User Experience Key To Improving DApps And DeFi
There seems to be a unanimous belief that the future growth of DApps and DeFi is dependent on improvements to user experience, ease of access and functionality. Dapp.com’s Lu believes that developers have been focusing on creating easy-to-use, friendly applications. In the past, users may have been daunted by the complexity of DApps and their features: “With all those improvements made, mass adoption is just a matter of time when we have more innovative products being launched.”
Jordan offered a similar take on the challenges facing DApp developers and companies, pointing out two key areas that have been a particular sticking point: Products need to be “as good and accessible as traditional web products and also have all the advantages of using a blockchain.” He added:
“Onboarding users in a streamlined way has been the second major challenge, although this has now been fixed by new ways of ensuring security and account recovery while also remaining non-custodial.”
Koleoshkin said that paving a smooth road for new users to explore and begin using these decentralized platforms is key. However, there are still some barriers to entry that make it difficult for people who are unfamiliar or completely new to the blockchain and cryptocurrency space:
“New users not only need to have a wallet or extension installed, but they also need to know how to use it properly with Dapps. Once this initial hurdle is overcome, the overall experience becomes much more accessible and intuitive.”
Speaking at the digital conference Unitize on July 9, Richard Ma, co-founder and CEO of Quantstamp, highlighted security concerns as a major hurdle facing DApps and DeFi applications. Ma cited the theft of $26 million from various projects this year as a cause for concern. In order to combat this, Ma said that “it’s crucial to have proper security ahead of time.”
An Amalgamated Future
It’s clear to see that a large number of users in the blockchain space have realized the value of DApps and DeFi, and this has only been accelerated in 2020. The future of the space certainly looks promising, but what it will morph into is subjective.
Jordan believes that in the next five years, people might not even realize they are using platforms that are powered by blockchain technology: “My view is that we’ll see a big jump driven by consumer-facing Dapps that don’t require any blockchain knowledge, and don’t even promote themselves as using blockchain.” He added that new blockchain platforms will transform users’ experiences, from “Eth 2.0 to Cardano, Flow (from CryptoKitties dev Dapper Labs), Near and Harmony.”
Koleoshkin went as far as saying that the term DApp might not even be used in a couple of years. This is mainly due to the fact that “Dapps are a separate category of apps leveraging native payments functionality, distributed storage, and smart-contracts functionality. More developers will use these tools to build a better user experience, but they wouldn’t be called a DApp.”
Compound Tops $1B In Crypto Loans As DeFi Farmers Keep Digging For Yield
Compound, the leading lending protocol on Ethereum, has broken a billion dollars in total assets borrowed, according to the tracker on its website.
This is the latest milestone for a project that has led the yield farming craze in decentralized finance (DeFi), where both large and small investors search for the best place to park their assets in order to earn the strongest returns.
The platform reached $933 million on July 10 before surging by an additional $70 million in loans over the weekend. Prior to the current rush to mine fresh COMP, the loans were typically understood to be taken out to facilitate further crypto trading.
The loans are generated permissionlessly, with users only having to provide collateral in one of several different approved crypto assets. That is, every borrower is also a depositor, though it is also possible to deposit funds without lending, in order to increase the pool from which others can borrow.
Since June 15, both borrowers and depositors have been earning the Compound governance token, COMP. This has led to a spike in activity on the site.
Other DeFi projects have since followed suit, either releasing or announcing their own governance-token-mining schemes (see crypto-index protocol Balancer, flash-loan purveyor bZx and automated market maker Curve for examples).
COMP’s debut has also yielded some strange situations, such as in the case of DAI. As of now, nearly $800 million in DAI have been borrowed on Compound, this despite the fact the total market cap of DAI is only $195 million, according to CoinGecko.
This is because users want to maximize their COMP returns, so they increase their leverage by using various strategies to borrow DAI, deposit what they borrowed and then borrow more.
Right now, dai is by far the most popular token to borrow, with USDC and ETH following as a distant second and third.
Close followers of the DeFi boom may be somewhat confused by the $1 billion number here, as DeFi Pulse reports Compound as having $699 million in total value locked (TVL), as of this writing. This confusion is caused by the fact that the site reports Compound’s deposits minus the loans it has made. Setting loans aside, Compound currently has $1.7 billion in total deposits, according to its own tracker.
To illustrate how dramatic the release of this token has been: DeFi Pulse shows Compound as having just under $100 million in total deposits on June 14, the day before COMP mining began.
Compound was first announced in September 2018, with funding from Bain Capital Ventures, Andreessen Horowitz and Polychain. It announced a subsequent $25 million round last November, led by Andreessen Horowitz.
As of this writing, the COMP token is trading at $173, down from an all-time high of $373 on June 21, according to CoinGecko.
Twelve-Fold Gains For Aave’s LEND Token Might Be More Than DeFi Hype
There’s one thing that all investors like: doubling, tripling, or even quadrupling their money. How about a 12-fold increase?
That’s what traders have reaped this year from the decentralized lender Aave’s LEND token, up about 1,200% on a year-to-date basis.
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Other tokens from the realm of decentralized finance, known as DeFi, are up by triple-digit percentages, including Synthetix’s SNX, Thorchain’s RUNE and Kyber’s KNC. Bitcoin, the biggest cryptocurrency by market capitalization, is up just 28%.
It would be easy to write off such outsize gains as just another example of the speculative hype of cryptocurrency markets, where big price swings are common. But in the case of the LEND token, the price rise may have been fueled by an increase in actual usage.
Some $158 million of value have been deposited as collateral in Aave’s lending protocol, just six months after the project went live in January. By comparison, Compound, another decentralized lender, had just $27 million in its protocol at its six-month mark in March 2019. Compound has since gone on to increase the figure, known as total value locked, by 25-fold to $684 million, to become the largest lending protocol, according to DeFi Pulse, which tracks the industry.
“The main reason I suspect LEND has received so much attention is simply because, after launching the mainnet early this year, usage on Aave has grown incredibly fast,” Jack Purdy, an analyst with digital-asset research firm Messari, told First Mover in an email.
Last week, Aave rolled out a new feature, “credit delegation,” which effectively allows users to set up credit lines that could then be drawn down by other users, in a form of peer-to-peer lending. Under the program, investors can deposit stablecoins – digital tokens backed by U.S. dollars or other government currencies – and then delegate the right to borrow against that collateral to another user.
The delegator can set terms of the loans, such as interest rates and amount of capital that can be drawn. Since the ultimate borrower isn’t posting collateral via the platform, the delegator is bearing most of the risk, and might be able to charge higher interest rates.
“Aave’s introduction of credit delegation is groundbreaking,” Su Zhu, CEO of the Singapore-based digital-asset fund Three Arrows Capital, told First Mover in a Telegram message.
Aave CEO Stani Kulechov told First Mover in a Discord chat that the “market capitalization of LEND has been following mostly our protocol growth.”
“Most of the traction comes due to our wide asset selection that you can use as collateral and the ability to borrow flash loans without collateral, which has become a popular tool,” Kulechov wrote.
In a Tweet last week, Kulechov wrote that credit delegation could help push DeFi into “financial debt markets worldwide,” making it a “liquidity backbone.” Borrowers could be cryptocurrency exchanges, market makers, lenders, institutions, businesses, non-governmental organizations or governments, he wrote.
OKCoin Launches Its Own DeFi Price Oracle Based On Compound Tech
Global crypto exchange OKCoin unveiled its own oracle as a verifiable price data source for the decentralized finance, or DeFi, space.
OKCoin fired up its own price oracle for the DeFi space with data traceable back to its origin, offering verified accuracy.
“OKCoin has launched OKCoin Oracle, a signed price feed that can be used for reliable on-chain pricing in support of the burgeoning DeFi ecosystem,” OKCoin director of communications, Will McCormick, told Cointelegraph.
“OKCoin Oracle acts as a trusted source of market data, and anyone can publish OKCoin pricing on-chain. Once on-chain, OKCoin is verifiable as the source of the data, using the OKCoin Oracle public key.”
DeFi Booming In 2020
The DeFi space has boomed in 2020, with many related assets yielding soaring price valuations, including Balancers BAL asset, Compound’s COMP token and others.
DeFi relies on crypto price data for functions and capabilities such as lending and stability. These ecosystems derive such price data from oracles, which essentially hold as a gateway between blockchain and the physical world. Oracles gather price information that various sources posted to blockchains, averaging them into one price before handing it off to smart contracts, ultimately resulting in a price point geared toward accuracy.
OKCoin’s Oracle Aiming For Added Stability
Multiple DeFi entities have faced a number of difficulties in 2020, including hacks and flash loan attacks resulting in hefty losses.
“One of the prior vulnerabilities is that exchange pricing posted on-chain could come from anyone which led to some of the DeFi flash loan crises we saw earlier this year,” McCormick said in reference to price oracles. OKCoin’s oracle leaves an evident trail leading to its exchange, validating price came from OKCoin as a trustworthy source.
The Exchange Used Compound For Structuring
DeFi project Compound gave OKCoin the structure and blueprints used in the oracle, McCormick explained. “Compound created the Oracle standard and made it available via API,” he said.
OKCoin’s oracle boasts compatibility with Compound, according to a July 15 statement from OKCoin. “Having a reliable feed for on-chain price data is critical for DeFi growth and use of Compound,” Compound CEO Robert Leshner said in the statement. “This effort from OKCoin is an important contribution to the decentralized finance ecosystem.”
OKCoin’s oracle also touts compatibility with other interested DeFi outfits, McCormick included.
DeFi Yield Farming Is Driving Adoption, But Stakeholders Urge Caution
Industry observers say unchecked yield chasing may have negative consequences on the fledgling DeFi market.
Three years on from the initial coin offering mania of 2017, decentralized finance is the new hype. Spurred on by the promise of high annual gains, traders appear to be sowing heavily in crypto’s latest yield-generating arena that is DeFi.
Projects in the early days of crypto seemed to focus on payments and finance in general; however, entrepreneurs began expanding the utility for blockchain technology into other use cases with varying degrees of success.
With DeFi, an argument can be made that crypto is returning back to the promise of democratizing finance.
By eliminating the need for traditional gatekeepers, global financial inclusion can reach a more diverse demographic.
DeFi evolution has seen decentralized exchanges experiencing greater trading volumes, with lending and money market protocols attracting increasing investment. Over the past few weeks, however, yield farming has taken center stage, with investors eager to provide liquidity for DeFi projects in exchange for high-yield governance tokens.
Amid the growing popularity of yield farming, also called liquidity mining, some industry observers say the trend is only a fad that will inevitably slow down, while DeFi proponents argue that rising prices are irrelevant and that the focus should instead be on the robust financial systems being created.
DeFi lending protocol Compound kicked off the yield farming frenzy back in June. At the time, the project introduced a new token distribution mechanism that rewarded liquidity providers with COMP, a governance token for the Compound platform that gives tokenholders the ability to vote on protocol-level issues affecting the project. In no time, the price of COMP rose meteorically, ushering the current yield arbitrage gold rush.
As of the time of writing, Compound’s total value locked (TVL) is over $770 million, according to data from DeFi analytics tracker DeFi Pulse. In mid-June, this value was about $100 million, indicating that the project has grown almost eight-fold in barely a month.
Apart from providing percentage yields and governance tokens for users, liquidity mining creates a positive use loop for DeFi protocols. Usability has often been the bane of DApps, with projects unable to retain their customers beyond a certain timeframe. With yield farming, however, lenders and borrowers can earn incentives for participating in the market.
Thus, it has become common to see investors deposit tokens, borrow other coins and move their positions across different markets, depending on the arbitrage opportunities available.
Yield stacking has become the latest iteration of the liquidity mining process whereby investors borrow from one platform and deposit in another project multiple times to increase their overall gains. Stacking yield is also allowing traders to earn several governance tokens from their expanded portfolios.
In its recently published “2020 Q2 DeFi Industry Research Report,” TokenInsight reveals that whales have earned over half of the COMP mining rewards. Also, the report indicates that centralized lending platforms are getting in on the liquidity mining action as well, with Nexo having deposited over $60 million in the stablecoin Tether (USDT) to farm COMP governance tokens.
DeFi startups like Instadapp are even creating tools that streamline the yield stacking process to allow investors to efficiently utilize their trading capital. Given the low float of these governance tokens, it’s perhaps unsurprising to see them experiencing substantial price gains.
Another “ICO-type” Mania?
The expiration of the distribution phase of tokens like COMP might alter the current economics of the yield farming market. Investors apparently aware of this reality are no doubt looking to be first-movers in this new arena and reap the benefits that accrue for traders who front-run any prominent niche in the crypto space.
Thus, it is most likely that market participants who missed out on the initial gains for projects such as Compound and Balancer will be on the lookout for the next project to kick-start its own liquidity mining phase.
The likes of Ren, Synthetix, Curve and even flash loan platform bZx are thought to have liquidity mining plans in the pipeline. Commenting on the difference between the current yield farming buzz and the ICO mania of 2017, Johnson Xu, head of research and analytics at crypto analytics platform TokenInsight, remarked:
“I believe the DeFi yield farming craze is fundamentally different compared to the 2017 ICO craze. In the short term, the high-interest rate and the incentivized liquidity mining mechanism has created a hype in the space which directly pushes up the DeFi market, resulting in a speculative push in the DeFi space. Without any further applications and use cases to be created in order to accrue meaningful value within the space, we believe the recent DeFi hype could be short-lived.”
For Xu, the significantly higher entry barrier into the DeFi space compared with the 2017 token sale era will incentivize efforts geared toward robust market development in the former. While the current euphoria might echo the “pump and dump” cycle common in the ICO space, DeFi participants appear to be working toward creating tangible value for the industry as a whole.
Stani Kulechov, CEO of DeFi lending protocol Aave, also echoed Xu’s sentiments, highlighting the fact that the current high yields are incentivizing greater participation.
Commenting on how the yield farming hype differs from the ICO craze, Kulechov told Cointelegraph: “2017 was different in the sense that people were throwing funds into anything, whereas in DeFi you cannot be DeFi without having such characteristics such as non-custodial protocol.”
The Curious Case Of yEarn
To buttress the earlier point about investors being on the hunt for the next liquidity mining opportunity, consider the case of yEarn, a yield aggregating protocol developed by Andre Cronje. As previously reported by Cointelegraph, despite Cronje warning that its YFI governance token was of little value, investors still flocked to the platform, triggering a single-day price run of 4,000%.
YFI was even listed on the automated market maker platform Uniswap. As of the time of writing, data from crypto market monitor CoinGecko shows YFI listed on exchanges such as FTX and Poloniex. Worth $30 upon the project’s launch, YFI token price surged to $4,661.97, an increase of about 15,400% in barely a week. Cronje told Cointelegraph: “I was not expecting this at all.”
Investors earn YFI tokens by providing liquidity to a suite of projects under the aegis of the yEarn protocol.
The system functions as a market monitor that provides information about the DeFi protocols offering the highest yield, updated in real time.
According to an announcement published on July 24, yEarn is set for its “version 2” roll-out in the next couple of days.
As part of the announcement, the project said the update will solve issues concerning the rigid nature of the first iteration. The second version of yEarn will comprise three main components: yVaults, controller and strategies. With yVaults, investors will be able to track the share of their tokens in any liquidity pool.
The other two components — controllers and strategies — allow traders to create a subset of governance protocols aimed at obtaining the highest yield in the market and maximizing returns with as little capital loss as possible.
According to the announcement, yEarn v2 will eliminate entry barriers to investors with relatively small capital exposure, stating: “The system is designed to be gas efficient for small yield farmers, allowing deposits and withdraws as low as ~$2 even at 100 gwei.”
Is yield Farming A Problem For DeFi?
The hype surrounding liquidity mining on Compound saw the project briefly overtake Maker as the largest DeFi protocol by TVL. Currently, yEarn is the ninth largest, ahead of others such as dYdX and Uniswap.
Given the nature of the mania surrounding crypto’s new yield-generating machine, some pundits are drawing parallels with the ICO craze of 2017. If liquidity mining is the new ICO, then TVL is the new market capitalization in that its growth creates an initial positive loop that spurs further participation from investors.
However, the increase in TVL in the first instance is due to investors banking on the promise of high annualized yields from providing liquidity to these DeFi protocols. As long as governance token prices continue to increase, traders seem incentivized to keep on lending and borrowing, stacking yields in the process.
It took 20 days from the total DeFi TVL to move from $2 billion to $3 billion. In less than a week, the DeFi market is already 57% of the way from the $3 billion mark to the $4 billion valuation mark. With such accelerated growth comes concerns over whether the DeFi market is battle-tested enough to handle stresses on it. Responding to this question, Cronje opined:
“The Defi market has this interesting concept where you ’vote’ with your funds. So, you ’vote’ for the protocol you think is safe with your LP funds. The onus is shifting to the owner of the funds and away from the protocol. LPs need to be much more aware of where they are putting their funds. If not, it will be an easy breeding ground for scams, much like the ICO craze.”
For TokenInsight’s Xu, the risk is not an alien concept for crypto participants, adding that yield farming still needs to be tested by the broader market, as there are significant risks around smart contracts and the market in addition to infrastructure failure, among other factors. Xu added:
“I strongly suggest DeFi projects do not jump the gun to simply offer attractive yield farming to attract users and capitals. I think the most important aspects in the DeFi space is to build a solid infrastructure and token economy with a proper incentivized mechanism to create a ripple effect in the industry.”
According to Xu, the growth in the DeFi space is only beginning, as TVL will continue to increase, attracting more investors. As previously reported by Cointelegraph, institutional investors are beginning to turn their attention to the DeFi market.
With investors eyeing high yield potential, Cronje argued that the focus should move toward sustainable gains. Commenting on the potential implication of the current state of the market, Cronje stated: “I know ~10% APR doesn’t sound as good as 1000% APR, but that’s the sustainability.
The yield obsession while fun, could cause damage in the long term if not handled correctly.” Aave’s Kulechov also made a similar point about de-risking the DeFi space. In a Tweet published on July 22, he called for an emphasis on “safety farming” where the focus would be on incentivizing activities that do not endanger the stability of the market.
The Future For Unregulated Bitcoin Exchanges
To KYC or not to KYC? In this episode, CoinDesk’s Anna Baydakova talks to Hodl Hodl and Bisq, two non-custodial, no-KYC bitcoin exchanges.
One year ago, the Financial Action Task Force, the global anti-money laundering watchdog, ruled that crypto transactions data should be controllable, and ever since the question has been not if you know your customers (KYC) but how you do it.
But not all bitcoiners have surrendered to this norm. Hodl Hodl and Bisq don’t provide centralized custody and don’t check user identity. They also don’t employ the blockchain tracing tools to block the “tainted” coins (blacklisted as coming from illicit activities), which has become a must for major bitcoin exchanges these days.
What comes with this? A chance to buy and sell bitcoin without revealing your identity, as well as much more responsibility over how you buy and store your crypto. Max Keidun, the CEO of Hodl Hodl, and Steve Jain, contributor to Bisq, dig into why, in the times of crypto compliance, people still might need (or maybe just lawfully want) to keep their bitcoin deals to themselves.
There are more questions to arise from such old-school cypherpunk thinking: how can you make sure you don’t get scammed at these p2p platforms? What do you do if you buy “tainted” coins blacklisted by the FATF-abiding exchanges and vendors?
Max and Steve share their takes on this, and the main explanation is probably: “everything has a price.” Including freedom from surveillance and data leaks.
We also touch the matter of decentralization that is important to both Hodl Hodl and Bisq. Hodl Hodl is planning to open source itself, so everyone can clone and run their own p2p bitcoin exchange in case the regulators go after Keidun and his team. And Bisq fully decentralized last year, when it turned all its decision making over to a DAO.
What Crypto Lender Celsius Isn’t Telling Its Depositors
Standing in a spacious, white living room and sporting a black T-shirt, Alex Mashinsky, CEO and co-founder of cryptocurrency lender Celsius Network, urged his customers to ignore the naysayers.
“Don’t listen to the FUD-ers, look at the facts,” Mashinsky said on the YouTube livestream on July 17, using crypto slang for “fear, uncertainty and doubt.” A few minutes later, he reassured the audience of “Celsians,” as the platform’s users are nicknamed, that the company is prudently deploying their crypto deposits.
Like a bank, Celsius borrows from one set of clients, lends to other customers and pockets the difference in interest. Unlike a bank, it only borrows and mainly lends cryptocurrency, and it does not have government deposit insurance. The company claims to have gathered a total of more than $1 billion worth of crypto deposits as of June.
As an example of its high lending standards, Mashinsky said Celsius strictly demands collateral when making a loan.
“When you’re using any other platforms that are like Celsius, what you care about is, who is the borrower?” Mashinksy said. “Is the lender doing non-collateralized loans? Celsius does not do non-collateralized loans. … Celsius will not do that because that would be taking too much risk on your behalf.”
The statement was at odds with what Celsius’ own representative had told CoinDesk just a few days before.
In response to a question from CoinDesk, Anastasia Golovina, an external spokesperson for Celsius at the Ditto PR agency, confirmed the company also makes uncollateralized loans, on what she described as a limited basis.
“Celsius’ total uncollateralized loans are less than a fraction of 1 percent out of tens of thousands of loans issued since 2018,” Golovina told CoinDesk by email on July 13, referring to the number of loans but not the dollar volume. “All of these were normal size loans and were done to institutions with billions of dollars in equity.”
When subsequently asked about the dollar volume of the uncollateralized loans and about Mashinsky’s denial of their existence on the AMA, Golovina did not provide a response.
Even if small, the uncollateralized lending is one of several salient items that Celsius has downplayed or not shared with depositors.
Celsius is a major player in a budding corner of the crypto industry. In the past year, lending activity has mushroomed as some holders sought to earn a yield on their assets, others sought to raise cash without selling their coins and market makers borrowed to fill orders quickly.
The phenomenon could potentially improve liquidity and price discovery for crypto assets. (Disclosure: Another crypto lender, Genesis Capital, is owned by Digital Currency Group, which is also the parent company of CoinDesk.)
But like all lending, the crypto kind carries risk – and Celsius may be taking more of it than depositors fully realize.
Whatever the amount of unsecured lending in which Celsius engages, the majority of Celsius’ loans appears to be collateralized. To borrow $1,000 with a 0.7% interest rate, for example, a trader needs to pledge around 0.43 BTC of collateral to Celsius as of this writing, and if the value of that collateral dips, the loan is subject to margin calls.
But Celsius has also at times invested deposits in perpetual swaps, futures-like contracts with no expiry date, people familiar with Celsius’ business said.
Reportedly pioneered by the BitMEX exchange, perpetual swaps settle to an index periodically, letting traders maintain their positions without rolling them over. This activity, one source said, increases Celsius’ vulnerability to brutal sell-offs like the one bitcoin endured in mid-March, which led to a spike in forced unwindings of such contracts at BitMex.
“The problem is that some of that is done on BitMEX, and you take March 12 again and BitMEX closes down through the margin-call floor – the extra 2% profit is now negative 10% profit,” this person said, describing a hypothetical scenario.
Celsius denied investing in perpetual swaps.
“Our business is to lend out coins to institutions,” Mashinsky said in an email to CoinDesk. “Celsius lends mostly to large institutions and sometimes to exchanges, both provide us with collateral.”
A serial entrepreneur who helped pioneer voice-over-internet-protocol (VOIP) technology, Mashinsky founded Celsius in early 2018. Like many in the crypto space, he touts his service as a way to democratize finance. An August 2019 pitch deck obtained by CoinDesk says the company’s vision is to provide “fair interest income for 7 billion people.”
Also potentially concerning to depositors, people with knowledge of the matter said, is that Celsius lends out portions of the collateral borrowers hand over.
An over-the-counter desk trader likened this practice, known as rehypothecation, to the way subprime loans were repackaged and sold as mortgage-backed securities and then resold as collateralized debt obligations in the years leading up to the 2008 financial crisis.
Because of rehypothecation, which the trader said several crypto lending platforms are engaging in, he is seeing many clients pull out of lending and move toward options contracts.
Another source familiar with Celsius’ business said the lender’s rehypothecation of loan collateral is also why crypto miners don’t take out loans from the firm – they don’t want to end up unable to access crypto they mined.
In response to questions about rehypothecation of collateral, Golovina said Celsius won’t “discuss our best business practice and the competitive advantage of our business model.”
Celsius raised its startup capital through an initial coin offering (ICO) in early 2018. The company swapped its CEL token for bitcoin (BTC) and ether (ETH), the largest and second-largest cryptocurrencies by market capitalization, respectively.
However, Celsius did not convert the crypto it had received to fiat until after the market tanked, which caused it to lose about half the value of the proceeds, people familiar with the sale said.
Public information supports this claim. In September 2019, Mashinsky told CoinDesk the ICO was valued at $50 million. But its financial statements filed with the U.K. registrar Companies House in May 2020 show sale proceeds of only $25 million as of Feb. 28, 2019. (Celsius is based in Hoboken, N.J., and privately held, but has a subsidiary in London, and is thus required to file financials with the registrar.)
Celsius chalked up the difference to an accounting practice, but acknowledged it did not convert the crypto to fiat in the same month that it was raised.
“While Celsius reported an ICO worth $50 million, when the coins converted to fiat the value of the coins dropped as the market dropped in accordance,” Golovina said. “In addition, for tax reasons, we recognize revenues over several years as we use the funds to build the product.”
Celsius recognizes ICO proceeds as revenue only when it converts the funds to dollars, she said, again citing tax reasons.
It waited to convert the crypto to dollars because the firm identifies as a “HODLer,” she added, using crypto argot for a long-term investor.
In the last two months, Celsius raised close to $30 million, consisting of $18 million crowdfunded on BnkTotheFuture and $10 million from stablecoin issuer Tether.
One Billion, Two Billion, Three Billion, Four? DeFi’s Knocking On TradFi’s Door
* Projects like MakerDAO, Compound, dYdX and Dharma realized in 2018 they were a distinct group with shared interests within the cryptocurrency industry.
* Finance has been part of Ethereum from the beginning, but the first attempt to do finance on the “world computer” ended in disaster in 2016: The DAO.
* A unit of account was key to make decentralized finance (DeFi) startups usable, so when dai launched during the bitcoin run-up of late-2017 and didn’t crash when ether fell, it was a positive signal for the space.
* Within a year of dai’s launch, a full stablecoin boom was underway.
* The third big moment for DeFi came this summer when liquidity mining took off on Compound. Some $3.6 billion in crypto is currently touching the industry’s DeFi platforms.
“In May 2018, Dharma hosted a meetup at the Polychain offices in San Francisco, called the ‘Decentralized Finance Meetup,’” Dharma co-founder Brendan Forster told CoinDesk this month.
It included all the early companies – the Maker Foundation, Compound Labs, 0x, dYdX, Wyre – and he said roughly 150 people showed. Forster credited the gathering with a dawning realization at the time that DeFi startups were a distinct “cohort” within the industry.
Now in 2020, that cadre of DeFi upstarts has become the best justification for the persistence of the world’s second-largest blockchain.
The name from that meetup – “decentralized finance” – stuck, because “decentralized” was more specific (and perhaps aspirational) than prior terms like “open finance” or “crypto-finance.”
Its shorthand, “DeFi,” had that double entendre with “defy.” Disruptors gonna disrupt.
And so, that small group of startups would build through the last Crypto Winter, making DeFi the narrative driver of Vitalik Buterin’s Ethereum protocol as it turns five years old.
From that Spring 2018 soiree, assets committed to DeFi broke $1 billion in February 2020, $2 billion on July 1 and $3 billion just 20 days later. At this pace, $4 billion is likely before August passes.
A Light In The Vitalik
DeFi is an overnight success years in the making.
“Bitcoin is the first DeFi, in my opinion,” Kosala Hemachandra, CEO of MyEtherWallet (one of the very earliest wallet companies for Ethereum), told CoinDesk.
But Ash Egan of the venture firm Accomplice thinks it takes more features than Bitcoin has to get to DeFi.
“I define DeFi as programmable, permissionless, transparent, trustless,” he told CoinDesk in an interview.
Even then, Preston Byrne, an attorney who was an early entrepreneur in the sector and skeptical about some of its tentpole projects, also traces this history to a project that predates Ethereum. Dan Larimer’s BitShares stablecoin, BITUSD, Byrne said, “It’s the same thing” as what MakerDAO made to mint dai.
Indeed, when we spoke last year, Rune Christensen, the founder of MakerDAO, told CoinDesk that BitShares “in a way it was the first blockchain 2.0, Bitcoin 2.0,” he said, a project that had “evolutionary potential.” (Byrne saw it differently.)
Christensen was one of several key pioneers who actually started making his DeFi product prior to Ethereum’s launch.
In fact, Buterin himself would pitch these coders on using Ethereum for their ideas.
That was the case with Joey Krug, the creator of the Augur betting app. He had been trying to make it work using Bitcoin scripts, but Buterin, who he met on a Skype chat, suggested he give Ethereum a try.
It took a masochist to build on early blockchains,” Krug said, and yet “what we’d built on Bitcoin in six weeks took us about 36 hours on Ethereum.”
And that’s in part because Ethereum had been built with what we now categorize as DeFi applications in mind.
In his original white paper, Buterin describes three categories of applications: financial, semi-financial and non-financial. He envisioned much of what we see playing out now: lending, derivatives and prediction markets, each of which represents several startups currently building on Ethereum.
“Ethereum really did strike me as the next step of crypto. Bitcoin gave us money, but Ethereum gave us finance.”
Another prediction app, Gnosis, also began work on Bitcoin pre-Ethereum, but the founders met Ethereum co-founder Joe Lubin and became some of the first staff at his ConsenSys venture studio. To its credit, Gnosis ran the first bets on Ethereum a week after launch, a prediction market to guess what Augur’s REP token would sell for.
By a few months after Ethereum’s launch, there were already a lot of decentralized applications (dapps) that had “launched,” many of them financial. There were projects like KYC Chain, already anticipating the problem of identity, and Otonomous, for chartering companies on a blockchain.
There were also companies in the less-reputable financial class, such as lotteries (Ethereum Jackpot), gambling apps (ESports EBets) and pyramid schemes (EthStick, The Greed Pit, Last Is Me!).
Ethereum actually made pyramids more trustworthy, Hemachandra said. Sure, they were all doomed to run out of new contributors, but one could also prove no one had absconded with contributions (which is how pyramids usually end). Perhaps that’s why this kind of product has persisted.
When ‘The DAO’ Breaks
Some ideas were good. Some were bad. Some were art. And some had potential if only they could find others to help them realize it.
For Ryan Tate, a ConsenSys alum and current candidate for U.S. Congress in Washington state, Ethereum looked like a way to finance small businesses. For him, it started with a brewery.
He’d been living in Mexico and making beer in his garage, an English variety that was hard to find there.
His brews were popular at garage scale, so he wanted to expand and open a real brewery. He even found a landlord who would take startup equity for rent, but he couldn’t get the rest of his financing in place.
“I wanted something different, something for small businesses,” Tate told CoinDesk in an interview. “Traditional bank lenders don’t want to capitalize small businesses.” Ethereum could.
He let go of the brewery and ended up in Seattle, but he hadn’t let go of the idea of a different way of financing modest endeavors.
He didn’t have computer-science training but he taught himself to code. In Ethereum he found something compelling. “Here’s this smart-contracting language that’s applicable to a lot more than what you can do with Bitcoin scripts,” he said.
He built a prototype exchange on it, and that earned him an early berth at ConsenSys. But then The DAO would come along, promising to fund enterprises outside of the traditional banking and venture capital infrastructure.
“I was never a fan of The DAO. I didn’t think it made any actual sense,” Krug, now a chief investment officer at San Francisco-based Pantera Captial, said. “But the fact that you could do it was interesting.”
The DAO was a complex thing that most people only remember now as a legal delusion.
In short: It was a fund that people could contribute ETH to (ultimately, $150 million) and get back tokens.
The idea had been that eventually developers would make proposals for funding for The DAO; token holders would vote on which to fund; and smart contracts would make sure the investors got paid back if their investments paid off. Probably it was going to do something with the Internet of Things.
But The DAO had security gaps, so cyber-criminals made off with $60 million of its ETH reserves in June 2016. This ultimately led to a hard fork that returned the stolen funds, one that forever laid to rest the notion that transactions on a blockchain are completely immutable.
On the world computer Vitalik said “fork” and the ETH-fam said, “How many tines?”
Ethereum Classic persists as the unamended, and largely unloved, ledger.
The fork was too much for Tate.
“I actually decided to leave ConsenSys because I disagreed with their notion of reverting the blockchain. It seemed like this false narrative,” Tate said.
But for MyEtherWallet’s Hemachandra, The DAO ended an era of cavalier attitudes about smart contract security.
Dharma’s Forster arrived on the scene shortly after the fork. “It sucks that what went down went down,” he lamented. “It was basically venture capital but for everybody.”
In that way, the token craze of 2017 was The DAO reborn, except hodlers just voted with their ETH, buying whatever token represented whichever initiative they liked (until the stock cops showed up).
In a letter to Jamie Dimon on the Chain blog in October 2017, founder Adam Ludwin wrote, “Crypto assets are a new asset class that enable decentralized applications.”
Ludwin’s letter used Filecoin as his main example, though, because crypto-finance didn’t really have mindshare then. “I think the Web3 narrative was just as popular if not more popular than financial-oriented tokens,” said Accomplice’s Egan, who spent that era within ConsenSys, which is now playing catchup on DeFi.
“Ethereum really did strike me as the next step of crypto. Bitcoin gave us money, but Ethereum gave us finance,” Forster said.
Like A DAI Peg In The Sky
In December 2017, as bitcoin hit all-time high after all-time high, MakerDAO debuted dai. In the middle of the craziest runup in crypto so far, it released a so-called “stablecoin,” designed to roughly hold a peg with the U.S. dollar. People were skeptical.
This was key to DeFi becoming a thing. Anyone who goes down the crypto rabbit hole will quickly encounter the uses of money, one of which is “unit of account,” that is, how does one measure what anything is worth?
“There are maybe 100 people in the world who use bitcoin or ether as the unit of account,” Forster said. “The vast majority of people, and – still – crypto people, think in dollar terms.”
The main use of crypto was and still is speculation. During the token boom, people wanted to trade to take advantage of swings in prices, but they also needed to lock in gains or staunch losses. A stablecoin was the most seamless solution. It would also prove to make lending and borrowing a lot more easily comprehensible.
“Once you have an asset that’s got a stable value, then you can connect the real world. You can program financial assets.”
Of course, at dai’s debut tether (USDT) already existed, but people were wary. Dai suggested alternatives could work – alternatives that didn’t rely on dubiously provable fiat reserves. When ETH prices fell but MakerDAO didn’t fall apart, that was even more bullish. A new boom emerged from the ICO ashes: the stablecoin bonanza.
The Cryptocurrency’s New Clothes
In late 2018, new stablecoins were debuting almost weekly.
Amidst that rush, CoinDesk spoke to Jason Fang of Sora Ventures, who said, “The reason why we’re seeing a lot more stablecoins is because our market went down 85% this year and having a widely used and trusted stablecoin would have saved us a lot of money.”
But there was more than that. If some asset could be made to resist volatility with software alone, that was very seductive.
“Once you have an asset that’s got a stable value, then you can connect the real world,” Compound founder Robert Leshner told CoinDesk in 2018. “You can program financial assets.”
Byrne, a prominent crypto lawyer now, was one of the most vocal critics at the time, posting that “stablecoins are doomed to fail” in 2017.
There are arguably three kinds of stablecoins: algorithmic, collateralized and fiat-backed. Of the first, the presumptive Maserati, Basecoin (then Basis) just gave up without launching in December 2018.
Byrne thinks Basis just realized its plan had faulty assumptions. But he said, “They didn’t give us the courtesy of explaining why they decided to shut down their scheme.”
Terra arguably remains in this class, and just expanded its capacity. Ampleforth (née Fragments) remain as well.
MakerDAO’s dai is collateralized, created via ETH-backed debt (with other assets like basic attention token (BAT) added later). Byrne said that dai “works really well when the price of everything is going up. It works very poorly when everything starts to go down.”
Finally, fiat-backed: tokens that could be redeemed one-for-one for government notes. Tether pioneered this category but was tottering under the weight of demand in October 2018, as Circle, Gemini and Paxos debuted their alternatives.
“The fiat-based stablecoins I think are really the only ones worthy of the name, but they aren’t really ‘stablecoins.’ They are ‘dollar coins,’” Byrne said. Collateralized stablecoins make intuitive sense, but so did the gold standard.
For now, the market seems to have settled on USDC, the lovechild of Circle and Coinbase, for reliability; USDT for convenience; and MakerDAO’s dai for decentralization. They all serve as a blockchain-antacid to cryptocurrency volatility, but as product guy Tony Sheng wrote in September 2018: “Their dreams are bigger: to compete with fiat currencies.”
Oh, The Block Heights You’ll Go
While everyone else was watching to see which stablecoin would unseat tether (none did), Leshner debuted Compound, the lending dapp.
He described it in September 2018 as a way to short tokens, that is, to make money as any of them lost value. That isn’t the only use case, though, but few people thought of crypto as a place for borrowing and lending then. Despite the fact that MakerDAO minted dai with debt, few understood this at the time.
Compound’s announcement came only a few months after the Dharma meetup in San Francisco. A similar meetup would take place at Devcon in Prague, and twice as many people would show, Forster said. Even competitors saw value in coming together to carve out this new way of thinking about crypto for everyone else.
Krug’s betting protocol, Augur, had launched in July, and, with nothing but a $100,000 grant, the automated market maker (AMM) Uniswap would go live November 2018. In only months it would rival Bancor and its $153 million ICO.
The URL for DeFi Pulse was registered in December 2018 and the first Wayback Machine capture shows MakerDAO, Compound and Uniswap as the top three applications, with almost 90% of all the collateral locked on MakerDAO. Combined, they held a mere $317 million.
The market leader would experience sharp growing pains in 2019, with serious stress on the system. It would ultimately adjust, however, righting the ship and expanding its offerings. By year’s end, it seemed to have found the opportunity in the chaos.
DeFi would grow as a steady drumbeat through 2019. Less morally dubious gaming would appear, such as a lottery in which players could only win (a little). Forster’s Dharma would pivot to become an app that made saving easy.
“In terms of Gnosis, we continued to develop prediction markets,” co-founder Stefan George told CoinDesk, “We also tried to go down the more regulated route. … This took a long time, so until today we still don’t have a license.”
In February of this year, DeFi Pulse, suddenly an indispensable data repository, would count $1 billion in collateralized assets on the various DeFi platforms.
Good Night Blocks, And Good Night Stocks
“Number go up” etc., but these were still small stakes in a niche game.
The mononymous Vishakh is a co-founder of a consultancy and development shop called Cryptonomic, which helps corporations get on Ethereum.
Trained in computers, Vishakh found a career in hard finance. He was at Bear Stearns the day it all fell apart, so he saw no ambiguity in the message Satoshi hashed into Bitcoin’s first block.
Vishakh wanted a better, more transparent system, but he also wanted a path to challenge traditional finance (TradFi). There, he said, “You can have an accumulation of thousands and millions of peer-to-peer trades.”
Vishakh and his partner tried to build something that could lead to mass scale, starting with one of the first ConsenSys hackathons in 2015, but in doing so he saw that Ethereum wasn’t ready for hard finance.
He and his partner wrote a post-mortem of their efforts in 2016, which he reviewed before we spoke this month and found his conclusions still hold: the software tooling is bad, and Ethereum lacks key features he thinks that it should have added by now, such as non-integer mathematics.
Krug made similar critiques, though on a smaller scale, and they both talked about Ethereum’s throughput limitations. Even early on, Krug said, “People knew it would be slower than traditional finance, but I don’t think anyone really foresaw it would be $10 to do a transaction.”
(Transaction fees on Ethereum have recently soared. A victim of its own success, according to whom you ask.)
Down Will Come TradFi, Bankers And All
Technology, like art, might flourish under constraints. Founders had discovered in DeFi the low-transaction-count applications that could take advantage of Ethereum’s network effects.
“There’s money in it. It’s not a failed experiment, but is it going to rival our financial frameworks? No,” Tate said.
He expects it will drive change at the Visas and Mastercards and commercial banks of the world, but, he said, “I don’t really see Ethereum, whether its version 1 or version 2, I don’t see it as the end-all.”
The thesis that Ethereum is fundamentally limited seemed to be confirmed on March 12, 2020, Black Thursday, when the ETH price plummeted and many loans on MakerDAO went into default. Clever operators managed to scoop up more than $8 million in ETH for free. For the first time, MakerDAO had to consider triggering an emergency shutdown.
Once again, out of the chaos MakerDAO would come through and also expand the number of crypto markets in which it was a factor, but users of DeFi products were nevertheless shaken.
But crypto moves fast.
Compound had already been teasing its decentralization process, and it would cook up the recipe that would pull this cohort out of its doldrums, one that had already been taste-tested when Synthetix debuted liquidity mining the prior summer, rewarding people for feeding its pool on Uniswap.
Compound, we would learn, planned to give users a token empowered with votes to change its rules, a “governance token,” called COMP. Distribution began on June 15, engendering a boom now called “yield farming.” Now $4 billion in total value locked (TVL) is within reach.
“It’s really been the last like, in the last 18 months, things have come to fruition,” Egan said.
Even DAOs are back.
And as base-layer rivals arise, the upstart blockchains all pitch their tech as a better host for this massive market than Ethereum’s. That is, Ethereum’s challengers are left to hope the sector doesn’t grow too fast to leave.
From the launch of dai in December 2017, it took 26 months for DeFi to lock up a billion dollars. The next billion took four months. It broke three billion on July 21 – six weeks.
“We are still at a very early stage and it can only grow from here,” Hemachandra said, “Now we should talk about mass adoption.”
DeFi Locked At $4B
Ether (ETH), the second-largest cryptocurrency by market capitalization, was up Friday, trading around $344 and climbing 3.1% in 24 hours as of 20:00 UTC (4:00 p.m. ET).
Since June 1, the total value locked in Ethereum-powered decentralized finance, or DeFi, has risen 300% from $1 billion to $4 billion, according to data aggregator DeFi Pulse.
In just two months, total bitcoin locked in DeFi more than quadrupled from 4,975 to 20,610 BTC. Total ether locked in DeFi has grown 60%, from 2.6 million to 4.2 million ETH. Stablecoin dai locked is up 19%, from 365 million to 435 million.
Azamat Malaev, co-founder of HodlTree, a new DeFi protocol for interest-yielding tokens, said the catalyst for this growth was investors locking crypto with a particular big DeFi lender to achieve “yield” or profit. ”It started with the launch of the Compound token distribution on June 15,” he said. “And, of course, with a time delay information began to spread.”
As DeFi Booms, Yearn Finance (YFI) Shifts 100% of Token Supply To Users
The DeFi sector recently achieved a record $4.23 billion in total value locked, so why did Yearn Finance distribute its full token supply to its users?
As Decentralized Finance protocols continue to grow on all fronts, their infrastructure grows alongside them.
While the total value of USD locked in DeFi recently hit a new all-time high at $4.23 billion, liquidity issues have also been a challenge and this led to the creation of decentralized liquidity pools like Uniswap and Balancer. These pools provide liquidity to DeFi platforms through smart contracts and offer interest to the liquidity providers.
The latest DeFi boom is partially driven by the addition of reward incentives in lending and the rapidly increasing popularity of yield farming. The process involves users gaming the protocol to “mine” reward tokens by moving from one asset to whichever one is the most profitable.
This appears to have been kicked off by lending and credit protocols like Compound rewarding lenders with COMP tokens, along with the base interest rate in an effort to improve liquidity.
In July, a new liquidity pool called Yearn Finance took the mainstage as 30,000 Yearn (YFI) tokens were minted and distributed to users, according to Flipside Crypto.
Decentralized Governance And Fair Distribution Comes To DeFi
In an effort to automate the process of yield farming, Yearn.Finance launched a set of smart contracts that maximize earning by automatically changing liquidity pools according to who the highest payer is. Through a multi-token staking mechanism, users of the Yearn.Finance protocol can also receive YFI, a governance token.
Governance tokens don’t give access to dividends or any other monetary incentive. Instead, they are used as voting chips that allow users to collectively decide the platform’s trajectory, thus making it truly decentralized.
On July, 17, Yearn.Finance founder, Andre Cronje, distributed the entire initial supply of YFI to users of the protocol in three separate liquidity pools. Yes, this is correct. The entire supply of YFI was distributed and the team kept none for themselves.
According To The Team Behind YFI The Distribution Was Carried Out In An Effort To:
“Give up this control (mostly because we are lazy and don’t want to do it), we have released YFI, a completely valueless 0 supply token. We reiterate, it has 0 financial value. There is no pre-mine, there is no sale, no you cannot buy it, no, it won’t be on uniswap, no, there won’t be an auction. We don’t have any of it.”
Ultimately, the intention of the distribution was to delegate governance rights (and responsibilities) to the community in a decentralized and fair manner, something which remains fairly revolutionary for the post-ICO crypto space.
Is DeFi Maturing Or In A Bubble Phase?
Since being listed on Uniswap, YFI’s price rallied by more than 4,000% in a single day and currently sits at $3,674. Cronje previously told Cointelegraph he has “no clue” why the token price grew so much since he only wanted to “distribute voting rights”.
As such, the current DeFi and yield farming mania is somewhat reminiscent of the 2017 ICO craze when tokens with no value were pumped for no apparent reason and even projects with names like “Useless Ethereum Token” were able to raise considerable sums of money.
Some may conclude that rampant speculation is taking over the sector and that the latest yield farming craze will eventually have an outsized negative impact on the entire DeFi ecosystem.
For example, in mid-July, Compound’s reward mechanism propelled Basic Attention Token (BAT) price to unreasonable heights before COMP altered their reward mechanism.
While this is a valid concern, liquidity pools appear to be adding value and increased utility to numerous DeFi platforms.
The fact that YFI and an increasing number of governance tokens are fully operated by their repsective communities is inarguably a positive step forward as this will further democratize the crypto space and preserve the decentralized ideas the entire sector was built upon.
2020 Is Becoming the Year of Staking With Some Major Achievements
While both PoW and PoS have a lot to offer, this year, in particular, is promising to be a special one for proof-of-stake.
Proof-of-work and proof-of-stake have a lot of benefits to offer the community, and the discussion around these algorithms has dominated conversations in the cryptocurrency community.
The use of staking will become more widespread this year on the protocol level with Ethereum 2.0’s expected arrival, along with the continued development of Cardano, Tezos and Algorand, ultimately changing the landscape of the future networks and blockchains. On the other side of the protocols is the mad rush for the hyper gains from decentralized finance projects that utilize high yield farming from loans, which will further the adoption of these staking protocols.
The Difference Between PoW And PoS
How are existing PoS projects handling staking and returns? Delegated proof-of-stake uses a fixed number of delegates that are selected to create blocks. These delegates are selected based on a voting system in which users are given a number of votes proportional to the number of tokens they own. Delegates, sometimes called witnesses, are tasked with consensus during the generation and validation of new blocks. Rewards are typically shared among those who voted.
In blockchain technology, solving the trilemma of security, scalability and decentralization has proven elusive. If we solve for the scalability issues of PoW, the network may not be truly decentralized, leading to the possibility of falling victim to bad players. If delegate nodes are known, denial-of-service attacks can be carried out. A lack of security could vaporize holdings at record speeds.
One novel approach is Algorand’s “pure proof-of-stake.” Algorand is a truly decentralized blockchain that has recently experienced a 30% market capitalization spike after its listing on Coinbase.
It relies upon the statistically low number of malicious actors and a lottery of nodes to ensure fair voting. Algorand 2.0’s protocol solves the trilemma, as its staking mechanism enables high throughput capacity without sacrificing the security that derives from decentralization.
With bonded PoS, users lock up part of their stake in the hopes that they get a chance to select the next block on the chain, and voting power is proportional to the amount of stake locked up. There’s a security benefit to this because if users are dishonest, they forfeit their deposit and ability to participate in consensus.
The downside is that users lose the ability to spend their stake if they want to participate in consensus. Meanwhile, Algorand consensus participants do not have to lock up their assets and are able to freely spend their stake when they please.
Ethereum has been working on a solution for its own scaling issues with Ethereum 2.0, and new platforms are trying to meet the need to scale effectively. Ethereum 2.0 has recently announced its final testnet before network launch.
Ethereum 2.0, aka “Serenity,” is an attempt to move away from a PoW consensus mechanism to a PoS consensus, with changes coming in stages — and timing subject to change. With phase 0, the Beacon Chain will implement proof-of-stake and manage the registry of validators, which will begin attesting blocks on Ethereum 2.0.
There are concerns that there won’t be enough validators online to stake during this round, but it’s likely more a question of “when” rather than “if” — but for the beacon to launch its genesis block, at least 524,288 ETH must be staked on the network, divided among a minimum of 16,384 validators.
Meanwhile, Ethereum 1.0 will run in parallel. The networks are planned to merge at some later date, but during this first phase, Ethereum 2.0 will not be processing transactions or be able to host decentralized applications. The beacon chain will introduce the native crypto of this network: ETH2.0.
The beacon chain will coordinate the PoW and PoS networks while communicating with shard chains and the Ethereum VM. Shard chains are subnetworks made of shards that enable increased scaling capabilities. In Phase 1, they will separate the Ethereum blockchain into 64 shard chains, as Ethereum is theoretically able to process 64 blocks simultaneously.
This paves the way for the merging of PoW chains and Ethereum 2.0 in Phase 1.5. Ethereum 1.0 becomes the first shard chain in the new PoS network with no break in the data or transaction history. PoW Ethereum becomes one of the PoS shards, integrated fully into the new chain.
Serenity Phase 2, eWASM, is named after the Ethereum Web Assembly that replaces the Ethereum Virtual Machine as the new virtual machine. During this stage, shard chains are no longer in testing mode, and their transactions should be able to scale across the entire network.
Once the network is fully functional, transaction capability, DApp hosting and executing smart contracts are now possible, and the transition is complete.
In contrast, Algorand’s newer network has its current consensus mechanism ready now, and Algorand 2.0 developers can host DApps on a truly decentralized network today. Ethereum 2.0 won’t be fully operational for another two years, and by then, their changes could be out of date. There are other networks, of course.
Other PoS Solutions
Tezos is a self-amending, open-source, multi-purpose platform for building DApps and smart contracts that use Liquid PoS — a version of delegated proof-of-stake — for consensus. Reference has been made to Tezos as the token with the power to unseat Ethereum. “Baking” is how blocks are produced and validated on the Tezos blockchain. Token holders can delegate their tokens to a bake but always retain ownership. Only the validator is punishable if there is a security fault.
While Tezos has improved upon Ethereum’s initial PoW system by solving some of the scalability issues, its network still lacks the security and decentralization necessary to make DeFi truly seamless. Bakers still hold a considerable amount of power over the network, whereas in the Algorand network, users’ influence is proportional to whatever their individual stake is.
Cardano is another PoS network, but there are no miners, just users who run nodes and stake the network’s native token (ADA). It recently announced the launch of its much anticipated Shelley upgrade. The Shelley Incentivezed Testnet allows ADA holders to test incentivization in a real-world context. It will also allow holders to earn real rewards by either delegating stake or running a stake pool. Its staking method is Ouroboros PoS and is made up of three epochs that are split into slots.
In each slot, each party evaluates slot leadership. Leaders are selected using the Satoshi algorithm so the probability that a stakeholder will be chosen as a slot leader is proportional to the number of coins a stakeholder holds. One party can be selected as the slot leader for multiple slots, and the selected slot leader extends a chain by creating a block for their respective slot. While Ouroboros is a consensus mechanism that solves some of the issues presented by Ethereum’s blockchain, it fails to truly solve the trilemma.
Algorand, by comparison, uses a “pure proof-of-stake” consensus that creates a unique and random committee for block certification with no central authority, ensuring that bad players can never corrupt the network. In addition, the network is capable of 1,000 transactions per second and is easily able to scale to billions of transactions. Blocks are finalized in under five seconds with no forking potential, so all transactions are final. This increases the security of holding Algorand’s crypto, ALGO.
Algorand makes it easy for developers to run web applications on its network and quickly integrate with applications in common languages by supporting a range of popular software development kits. With Algorand 2.0, developers will be able to digitize any type of financial asset on Algorand’s Layer 1. This will feature a low cost to execute, universal interoperability of all assets issued on Algorand, atomic transfers, as well as faster execution.
In conclusion, debates on the quality of proof-of-stake and proof-of-work may not be the question we as an industry should be asking ourselves, but rather, whether there is a way to use the strengths of both networks to achieve greatness.
Congresspeople Call On IRS To Take It Easy on Taxing Staking Rewards
Several of the more crypto-forward members of Congress have asked the IRS to sharpen up its guidance on taxing staking rewards.
On Aug. 4, four U.S. congressional representatives wrote to the Internal Revenue Service (IRS) asking the tax authority not to overtax rewards from Proof-of-Stake blockchains.
Explaining the difference in energy consumption between PoS and Proof-of-Work blockchains like Bitcoin’s, Representatives Tom Emmer (R-MN), Darren Soto (D-FL), David Schweikert (R-AZ) and Bill Foster (D-IL) wrote that the IRS may be overestimating gains:
“We believe that taxpayers’ true gains from these tokens should indeed be taxed. However, it is possible the taxation of ‘staking’ rewards as income may overstate taxpayers’ actual gains from participating in this new technology.”
Industry Response And Clarity On PoS
PoS is a growing concern for U.S. taxpayers. The Proof of Stake Alliance (PoSA), a lobbying group, wrote in response, saying that they applauded the letter, which they also helped to write.
Most major crypto exchanges in the U.S. have limited options for staking, possibly because exchanges like Coinbase and Kraken promote their work to make taxes easy for U.S. users.
Blockchain Task Force And Bulls In Congress
The four signatories to the bill are all members of the Congressional Blockchain Task Force and are known for their interest in crypto. They end their letter by describing their “continual efforts to future proof policy and tax regulations that will allow for safeguards, but also ensure that innovation won’t be driven elsewhere.”
Several of the signatories of today’s letter wrote a similar plea to the IRS in December calling for more guidance on taxing hard forks and air drops. Schweikert is the author of a bill he introduced in January that is concerned with excessive taxation of crypto — specifically that used in personal transactions.
Genesis’ Crypto Lending Rebounds In 2Q; Firm Acknowledges Unsecured Loans
Genesis Capital’s lending portfolio rapidly recovered in the second quarter after a sharp decline that resulted from the mid-March bitcoin (BTC) sell-off.
The cryptocurrency lender’s book of active trading loans increased 118% from the end of the first quarter to $1.4 billion at mid-year, the firm disclosed Tuesday. The blistering pace of growth was likely an anomaly, the company said.
“The 100% growth rate in our loans is a function of the fact that we cut our data set at about March 31,” Genesis CEO Michael Moro said in an interview. “To think that our loans outstanding would grow by over 100% in just three months going forward is probably unrealistic.”
The business took a hit when bitcoin, along with the mainstream financial markets, tumbled on coronavirus fears late in the first quarter. The fast comeback signals that crypto borrowing remains a popular tool for arbitrage among professional traders. They typically borrow fiat and put up crypto as collateral, or vice versa, or pledge one crypto asset as security for another.
Genesis Capital is the lending arm of Genesis Trading, itself a subsidiary of Digital Currency Group (DCG), which is also the parent company of CoinDesk.
Market chatter recently has focused on lending practices of the leading firms in the niche. As CoinDesk reported last week, Genesis’ rival Celsius Network has been quietly making at least some unsecured loans (despite its CEO’s public boasts that it demands collateral); investing a portion of depositors’ funds in derivative contracts, rather than in loans; and rehypothecating (i.e. lending out) collateral pledged by borrowers. All else equal, such practices increase risk compared to an always-collateralized, lending-only, collateral-retained model.
Genesis claims the interest it collects from borrowers entirely funds the interest it pays its lenders. Moro would not say whether it rehypothecates collateral. Genesis’ vice president of lending, Matt Ballensweig, said the firm makes some uncollateralized loans to “strategic partners,” but would not say how big a percentage of its loan volume was unsecured.
The clients who are lending their assets out through Genesis are high-net-worth individuals, hedge funds, and other asset managers, and they generate returns of 6% to 12% on those loans.
Firms that borrow from Genesis are hedge funds, quantitative trading firms, crypto exchanges, other crypto lenders, and crypto operating companies such as bitcoin ATM firms.
The lender is still seeing a flight away from U.S. dollar loans to bitcoin loans. Dollars loans made up 32% of the loan book, down from nearly 36.6% the previous quarter, and bitcoin’s share increased to 51.2%. The second-largest cryptocurrency represented in the loan book is ether (ETH), making up 7.4%.
Most of Genesis’ lending is directly affected by the spread between bitcoin’s spot and futures prices, Moro said. For example, a trader might borrow dollars to buy a futures contract as its premium over bitcoin’s spot price continues to rise.
But a period of low volatility in the spot price dampened interest in dollar loans that would normally be used for this kind of arbitrage, Moro said. Now, instead of borrowing greenbacks, traders are borrowing bitcoin to sell it short while going long futures in a crypto version of the classic Wall Street steepening curve strategy, said Ballensweig.
Ballensweig said he expects this dynamic to change in the third quarter as traders look to unwind futures trades. “Back in Q2 the traders were actually hoping for that premium to expand,” he said. “Now they’re saying, ‘okay, let’s take some of those profits and actually short the curve.’”
Trading Holds Steady
Despite decreased volatility in the spot market, Genesis’ trading volume increased by $1.25 billion to $5.25 billion in the second quarter. The majority of the trading volume was on over-the-counter trading desks with the rest being on exchanges.
With its new derivatives trading desk introduced in May, the firm traded $400 million across forwards and options with nearly 50 active counterparties across 10 different assets. Around 67% of the trading volume was executed bilaterally while the remaining 33% was executed on exchanges. Roughly 80% of the volume has been concentrated in BTC to U.S. dollar trades, with ETH to USD trades and other major tokens making up the rest.
The firm is also hoping to introduce capital introduction for family offices that are looking for crypto hedge funds that have the strategies, fee structure and asset exposure to fit their investing needs in the fourth quarter 2020 as a part of its bid to become a prime broker.
Opyn Removes Liquidity From Uniswap After $370K Stolen In DeFi Exploit
Attackers exploited a Uniswap trading loophole to get away with more than $370K.
Attackers have exploited a vulnerability in the Opyn ETH Put contract to walk away with more than $370,000.
One of the first members of Crypto Twitter to report on the theft, DegenSpartan, stated on Aug. 4 that the traders used flash loans to buy Ethereum Put oTokens (oETH) from Uniswap. They then reportedly chose an ERC20 token — in this case, USD Coin (USDC) — as collateral and exercised the trading option.
The result was reportedly a double transfer which effectively “stole” the collateral. According to blockchain records, the attackers received both their original Ethereum (ETH) deposits and USDC options.
In a Aug. 4 blog from Opyn, the platform estimates losses from the exploit at 371,260 USDC but said this amount may change.
“This exploit allowed an attacker to ‘double exercise’ oTokens and steal the collateral posted by certain sellers of these puts.”
Pulling Liquidity Quickly
Opyn realized something was happening within the day and issued a statement on Twitter, saying it had removed liquidity from Uniswap during its investigation.
Hey all, it seems like there has been an issue with some oTokens contracts. We are working hard on understanding this issue so we can let help users as best we can. We have removed liquidity from Uniswap in the mean time. Would be best to not open new vaults at the moment. — opyn (@opyn_) August 4, 2020
Attempting to prevent further abuse of this loophole, Opyn recovered 439,170 USDC of collateral from outstanding vaults using a white hat hack, effectively returning it to Put sellers. However, some users were still understandably upset at the loss and delayed response:
According to Opyn co-founder Alexis Gauba in a Discord chat session, the platform has offered to buy any ETH Put oTokens “at above market prices,” which she said were 20% above the best ask price at Deribit.
“This only applies to oTokens that were bought before today,” Gauba said. The last update she posted stated Opyn was working on a plan “to mitigate impact for ETH put sellers.”
A New DeFi Exchange Says It Has Solved An Industry-Wide Problem
This exchange aggregator thinks it can do better than the exchanges it aggregates.
Decentralized exchange aggregator 1inch.exchange has launched its own DEX. As part of their efforts, they promised to fix two major issues with this type of exchange — front-running and impermanent loss.
Announced on Tuesday, the Mooniswap exchange is an automated money market, or AMM, similar to Uniswap or Balancer.
It has adopted a distinctly different approach from Bancor V2, which uses oracles to stay updated on market prices.
Impermanent loss occurs when an asset’s price on an AMM slips compared to the going market rate on other exchanges. This intended behavior is how AMMs update prices, however their comparatively lower liquidity means that the slippage is rarely equal to the actual change in market prices.
Higher slippage opens opportunities for arbitrage traders to make up that difference by conducting the reverse trade. In essence, they extract a value in excess of the desired 50-50 balance, only returning the exchange fee of 0.3% to the liquidity pool. If the slippage amounts to 10%, a total of only 0.6% is returned to the pool as fees, while arbitrageurs pocket the remaining 9.4%.
Sergej Kunz, the CEO of 1inch.exchange, explained to Cointelegraph that arbitrage traders are the biggest earners in AMM protocols:
“The liquidity providers on Uniswap earn 0.3% on trading fees, let’s say $200,000 for a given period, while arbitrageurs earn $400,000 to $500,000.”
The team set out to fix this issue by trying to return more of the profit to liquidity providers instead of arbitrage traders. Kunz said that the team explored an oracle-based solution similar to Bancor, but found out that it is vulnerable to oracle front-running. “We realized that we need to fix the issue in a different way,” he said.
Inspired by a two year old post from Vitalik Buterin, they adopted the concept of virtual balances. When a high-slippage trade occurs, the internal balance of the exchange does not immediately reflect that change. At first, any new trade is still executed at the old price.
Over a five minute period, the price gradually updates to its true value based on the pool balances. That opens small windows of arbitrage opportunities, which are expected to be taken as soon as possible.
The difference is that now the exchange fee takes a much higher percentage of the trader’s profit. Thus, the arbitrageurs return a much higher proportion of the price slippage to the pool.
In addition, any normal trader who is placing orders at the old price will be effectively returning a portion of that slippage difference to the pool, as they are technically overpaying for the trade.
Kunz said that the added benefit of this system is resistance to front-running. Since the price is not updated immediately, no profit can be obtained by being faster than someone else.
Concurrent with the launch, the 1inch team received a $2.8 million funding round led by Binance Labs and joined by Galaxy Digital, Dragonfly Capital, FTX, and others.
Chia Network Raises $5M To Rival New Crop Of Defi-Friendly Base Layers
Chia Network, led by BitTorrent creator Bram Cohen with the aim of creating a programmable money platform, just raised another $5 million in an equity round led by Slow Ventures.
Despite the resurgence of token sales this summer, Cohen said the plan since 2018 has been to go the IPO route and rely on venture capital until the token launch. Meanwhile, the team is focused on gamifying early-stage contributions to attract a Chia-centric developer community.
“We’ve now finished that format so if you generate plots today and put the resources into building those they will still work the day mainnet goes live,” Cohen said, describing how the Chia Network uses “plots” of empty computer space instead of proof-of-work mining like bitcoin.
This latest equity round included Collab Crypto, IDEO and returning investors like Naval Ravikant. The startup has now garnered roughly $16 million in total venture capital since it launched in 2017, according to Cohen, who added the startup will use the funds to grow the team.
Gavin McDermott of IDEO said his firm has confidence in this yet-to-be launched blockchain because Chia creators are “early internet pioneers” who already “achieved significant milestones in terms of public node participation,” currently estimated at over 1,430.
Jill Carlson of Slow Ventures said she is looking forward to the mainnet launch, scheduled for later this year, even though Layer 1 blockchain projects have “largely fallen out of favor within the venture capital community,” which are now generally focused on decentralized finance (DeFi) and decentralized applications (dapps).
“There are a lot of exciting projects happening in those areas as well,” Carlson said of DeFi. “But we believe that much of the most exciting innovation is still occurring in new and soon-to-launch base protocols.”
Like many crypto startups in 2020, the Chia team is focused on DeFi applications. Cohen said Chia is poised to capture Ethereum’s market share by offering comparable DeFi functionality in 2021, while Ethereum may still struggle to scale. Chia President Gene Hoffman added, “It’s as functional as Ethereum. It might force you to do a different way than Ethereum, but there are reasons why.”
The Chia team aims to make money using traditional business-to-business offerings, even though the technology is being built through a hybrid open source model. Hoffman said the goal is to get “vertical vendors” like Paxful or banks interested in these tools and services rather than making a mass market play directly through retail.
Hoffman also said he is already exploring opportunities with several prospective clients, including government agencies, for live pilots when the network launches in several months.
“That market [government agencies] is feeling pressure from the China blockchain initiatives,” Hoffman said. “[Banks] are concerned about having to route all their transactions through Manhattan. … They too understand they want the positives of an open network that can still use types of decentralized identity.”
How One Line of Code Destroyed Yam DeFi
A single mistake cost them everything.
The now notorious project, Yam.Finance, was launched without a proper code audit just like many other projects in the space. Richard Ma, the CEO of blockchain security company Quantstamp, told Cointelegrpah that many DeFi projects are launched unaudited in order to capitalize on reverse psychology:
“Not having an audit is currently seen as a good way to use reverse-psychology to do marketing.” He added, “It creates the perception that these projects are so in-demand, and that you’re getting in on it at the ground floor, before other people have heard of it.”
According to Ma, many popular projects like Yearn Finance, Cream and Yearn Finance II were launched in the same fashion. However, he notes that it does not necessarily mean that DeFi users need to be paranoid about these beloved projects; Ma noted that “the most danger lies in the early days.”
If a project survives its early growing pains, it “starts to accumulate many informal security reviews”. In the case of Yearn Finance, Quantstamp ended up performing a formal security audit later on. Yam was not fortunate enough to make it to that stage. Though Ma performed an unofficial audit of some of Yam’s smart contracts, he did not audit the one that led to the project’s failure. Examining the code, said that a single line of code doomed the Yam farmers:
“totalSupply = initSupply.mul(yamsScalingFactor)”
This should have been followed by “div(BASE)”, in essence dividing the supply by a very large number — 10 followed by seventeen zeros. Without this divisor, the network was set to create “Zimbabwe style” inflation. According to Ma, there is no way of fixing this bug and as a result, approximately $750,000 worth of crypto is permanently locked.
Quanstamp’s CEO does not believe that the Yam debacle will break DeFi as “DeFi people have a way of being okay with volatility”. He also added that many crypto influencers invested in the now defunct project, noting that “So many influencers got into YAM – it’s about 1/3rd of my twitter feed now”.
Figuring Out Who’s To Blame For DeFi’s Persistent Security Issues
Is Ethereum’s architecture to blame for the growth of decentralized finance hacks, and will the network upgrade make the sector more secure?
The decentralized finance sector continues to gain unprecedented popularity as the total value of assets locked in DeFi products doubled to over $4 billion in July and is now approaching the $5 billion mark.
At the same time, an increased demand for such applications among users and developers makes it a target for bad actors, given the lure of direct access to funds. Over the past few months, hackers have stolen over $27 million from DeFi projects, and more attacks are expected to come in the near future. If this is the case, does the DeFi sector rely strongly on Ethereum for security, and will the ETH 2.0 launch bring more improvements in that area?
DeFi Apps Are New Crypto Exchanges For Hackers
While in 2018–2019, crypto exchanges were the number one target for hacker attacks, in 2020, it’s the decentralized finance market that’s on the radar. This is largely made possible by vulnerabilities in platforms’ smart contracts and technically imperfect security mechanisms. At the same time, as the history of hacks shows, the attackers use not only vulnerabilities but also various legitimate capabilities of blockchain to carry out attacks.
This is how hackers attacked Opyn at the start of August, a protocol that ironically claims to deal with DeFi protection. About $371,000 was stolen due to an exploit of the project’s native token, whereby a double-spend attack on Ethereum put options was implemented, granting access to users’ funds.
Previously, a vulnerability in the smart contract code led to another DeFi project hack where $25 million was stolen from the Lendf.me decentralized lending protocol and decentralized crypto exchange Uniswap. Both sets of developers built their own add-ons on top of the ERC-777 protocol, making the smart contracts vulnerable to reentrancy attacks. During such an attack, hackers withdraw funds repeatedly until their original transaction is approved or rejected.
Another hack occurred on June 28, again because of a code vulnerability. Hackers stole over $500,000 in ETH and other altcoins from the Balancer platform via an exploit of its token deflation mechanism that destroys 1% of the transaction amount upon each funds transfer.
Is Ethereum To Blame?
Evidently, the Achilles heel of DeFi projects is bugs and vulnerabilities in the smart contract codes, but what or who exactly to blame for this? Is it the DeFi developers who don’t properly test or audit code before launching their apps, or does the fault lie with Ethereum’s architecture, meaning that little depends on platforms?
On one hand, as Brian Kerr, CEO of DeFi lending platform Kava Labs, previously told Cointelegraph, the Ethereum blockchain’s architecture is not capable of responding to the security demands of the DeFi sector because testing possible bugs is almost impossible in the Solidity programming language.
However, most DeFi platforms are built on the Ethereum blockchain framework and, therefore, are experimenting with the original source code, especially if the result of these experiments is not thoroughly audited before the launch of the product’s final version, potentially opening doors for hackers.
Shayan Eskandari, a security engineer and auditor at ConsenSys Diligence, told Cointelegraph that most of DeFi hacks were preceded by changes made by developers shortly prior to platform launch. For instance, ERC-20 was not implemented in a standard way, or some new token designs added functionalities that changed the behavior of the ERC-20 token, causing unforeseeable issues. According to Eskandari, such changes led to Balancer pool attacks and the Lendf.me hack.
This suggests that in some instances, the teams working on particular platforms are to blame. In a conversation with Cointelegraph, Arnie Hill, CEO of Plutus DeFi — a full-stack DeFi aggregator — noted that most DeFi developers do not pay enough attention to security, as they are at the early stage of product development: “Today developers are paying more attention to the technical side and capitalization, focusing on how to build lending services on blockchain, rather than the security of smart contracts.”
Additionally, the complexity of DeFi products plays a cruel joke with them, according to Larry Sukernik, Digital Currency Group investor: “You get people with a big brains that need to be put to work. And when they’re put to work, the result is often a complex, brilliant, but massively unusable product.”
Charlie Lee, the creator of Litecoin (LTC), previously claimed that decentralization is to blame for everything. Decentralization actually was the reason for the hacking of the Opyn options protocol, as the team could not control or temporarily disable it in the event of an attack.
However, the presence of hackers is a natural occurrence, given that the industry is young. Nevertheless, as the DeFi sector evolves, its developers should become exceedingly aware of the growing security risks and work to reduce them, according to Hill:
“Scaling the market requires the use of more serious protection mechanisms and cooperation with regulators and auditors. At the end of the day, this is no longer just a network of DApps, but a multi-billion dollar financial market that is at the early stage of its development and, hence, hacks are inevitable, the same as it was with the digital banking industry some years ago.”
According to the latest report published by research company Dgen in collaboration with an open-source DeFi protocol Aave, ever since DeFi projects have become hacking targets, the developers began working on sandboxes and clear frameworks for dispute resolution. The analysts also noted that as long as scaling is of highest priority for DeFi developers right now, major hacks similar to the DAO incident of 2016 will likely happen again.
Another possible issue behind decentralized finance projects is that they rely on data oracles to deliver critical data like asset prices. The accelerating growth of DeFi platforms and products with their unique composability creates interdependencies and requires a solid source of asset pricing data, as explained by Paul Claudius, co-founder of DIA — a Swiss open-source DeFi oracle platform — who told Cointelegraph:
“Currently, most DeFi projects lack a pricing data solution that is transparent, open-source, and reliable. Many do not even share the methodologies used by oracles for pricing data. This creates substantial risks as bad actors can exploit both the technological and methodological vulnerabilities with unreliable data sources.”
Audit, Due Diligence And Insurance
So, is there anything DeFi teams can do to mitigate security risks, given that there are many products that successfully maintain a high level of security for their own and user funds?
Marc Zeller, integration lead at Aave, stressed the importance of conducting due diligence procedures before adding a new token to a DeFi platform to help avoid major hacks within the protocols. He also noted that projects dealing with decentralized finance may use the services of insurance companies to further protect user funds, although this is not always enough.
Speaking about the role of insurance in combating hacks, Kain Warwick, founder of synthetic asset platform Synthetix, said that DeFi insurance is very limited, adding: “DeFi still has significant tail risk, so insurance is likely to remain very costly in the short term, but as protocols mature, costs should come down […] allowing for simpler and more useful insurance to emerge.”
Insurance is good to have if the attack has already happened, but if the task is to prevent it, auditing and tracking suspicious transactions is what DeFi projects need in order to detect and fix vulnerabilities in the network before code flaws are exploited by hackers. Analysts point out that crypto exchanges play a significant role in tracking and locking down cryptocurrencies that may have come from hacked platforms.
As the industry scales, it’s getting increasingly important for DeFi developers to cooperate with regulators and work on both sandboxes and clear frameworks that allow for dispute resolution and arbitration if a hack occurs. According to Hill:
“Scaling the market requires the use of more serious protection mechanisms and cooperation with regulators and auditors. At the end of the day, this is no longer just a network of DApps, but a multi-billion dollar financial market that is at the early stage of its development.”
Will ETH 2.0 Bring More Security?
Some believe that along with scalability, network upgrades will bring security to DeFi, while others say that Ethereum’s 2.0 transition to the proof-of-stake algorithm will put the DeFi sector in even greater danger. Based on research by analyst Tarun Chitra, Dragonfly Capital investor Haseeb Qureshi came to the conclusion that DeFi protocols run counter to the network security mechanism based on the PoS algorithm. The problem is that funds locked in DeFi lending do not participate in staking and, therefore, are a security.
MolochDao analysts confirmed that the move to ETH 2.0 could open up new attack vectors for DeFi applications. However, there is a positive side of it — attacks on ETH 2.0 are easier to scale than attacks on ETH 1.0.
Before the rollout, the DeFi industry will face many new attacks, according to Consensys analysts Tanner Hoban and Tom Borgers, especially during the first phases of the transition to Ethereum 2.0. The reason is that at the beginning of the transition, validators must block their ETH until the proof-of-work chain is fully merged with the proof-of-stake chain. This will reduce liquidity and, according to the study authors, can lead to centralization.
So it’s likely that DeFi products will face major hacks again, but with the development of insurance and auditing tools, as well as market entry by global regulators, it will eventually become safer. Ethereum 2.0 may add its own fly in the ointment, but with a slow and gradual roll-out of the new model and sufficient testing, the risks are likely to be minimized.
MyEtherWallet Latest To Enter DeFi Arena With Integration On Aave And Ren
Ethereum’s oldest user-friendly wallet is staking territory in DeFi.
MyEtherWallet is expanding its integrations with decentralized finance through its dedicated wallet communication tool, MEWconnect.
On Thursday, the project announced an integration with Aave and Ren, which marks the first time that third parties are using the MEWconnect technology.
MEWconnect is a wallet linking system developed specifically for MyEtherWallet, and it is similar to those found on other DApp-enabled wallets like Metamask, Coinbase Wallet or more generalized frameworks like WalletConnect.
Kosala Hemachandra, MyEtherWallet’s CEO, told Cointelegraph that the system was originally designed to securely connect MEW wallet app users to its web-based frontend.
But the system is currently being used for more than just the MEW app, allowing users of other software and hardware wallets to connect to the Ethereum blockchain through its web interface.
The company says that this is part of its commitment to not lock in users into a specific solution, which it believes is the common goal of the Ethereum ecosystem.
For some DeFi protocols, MyEtherWallet provides two options. The Web interface currently supports MakerDAO and Aave, allowing users to interface with the protocols directly. Now, MEW became an additional wallet choice on Aave and Ren’s own frontends.
Hemachandra Was Hopeful That More Projects Will Follow:
“The MEWconnect API is very developer-friendly and we have every reason to hope that many more DApps will be able to integrate the protocol in the near future.”
With the integration, MyEtherWallet users now have a wider selection of lending options through Aave, as well as access to tokens from other blockchains via Ren’s trustless bridges.
Decentralized exchanges are as of yet still missing from the offering.
MyEtherWallet is one of the oldest Ethereum wallets in existence, having surged in popularity in 2017 as the initial coin offering boom unfolded.
Writing Bitcoin Smart Contracts Is About To Get Easier With New Coding Language
Bitcoin smart contracts are a tricky beast to tame, but a new language is making them easier to write, democratizing them in a sense.
Smart contracts can (among other things) allow users to set extra rules on their bitcoin, requiring these rules be met before the funds can be unlocked. Minsc, created by Bitcoin developer Nadav Ivgi, is a new programming language that makes it easier for developers to create these kinds of contracts so they can build them into bitcoin wallets and other apps more smoothly.
One of the goals of Minsc is to make smart contracts “more accessible to more people,” Ivgi told CoinDesk. That means both developers and users alike are able to take advantage of tools built by developers.
Tier One: ‘Script’ Smart Contracts
Smart contracts were first described by Nick Szabo in the 1990s. He theorized a way of automating legally binding contracts made between people.
Typical examples of smart contracts on Bitcoin include not allowing 0.1 BTC to be spent until 2021, or requiring more than one person to sign off on a transaction before the money can actually move. Smart contracts also power second layers on the Bitcoin protocol, such as the Lightning Network, which could help Bitcoin expand to reach more users.
Thus far, Bitcoin Script is the language that makes these contracts possible.
The problem is it’s tricky to work with Bitcoin Script. It is unlike other, more popular programming languages developers are used to, making it harder to wrap their heads around and compose in. This lack of understanding also makes it easier to make a mistake, potentially putting Bitcoin at risk.
The unwieldiness of Bitcoin Script was one of the factors that led Vitalik Buterin to design the Ethereum platform in the first place. Solidity, Ethereum’s first smart-contract language, was designed to be much easier for developers to read and thus use. And it has paid off: Ethereum has grown to become the go-to platform for smart contract developers.
Tier Two: Miniscript
Miniscript, released in 2019 by Pieter Wuille, Andrew Poelstra and Sanket Kanjalkar at Blockstream Research, chips away at this issue for bitcoin.
“One reason that we’re not anywhere close to using Script’s full potential is that actually constructing scripts for nontrivial tasks is cumbersome. It’s hard to verify their correctness and security, and even harder to find the most economical way to write things,” Wuille and Poelstra wrote in a blog post introducing Miniscript in September of last year.
Miniscript offers a language that’s easier to understand than Script, with built-in security guarantees.
Additionally, if there are two different ways of writing the same contract in Script, Miniscript is able to assess which one is “more economical.”
The computer eventually compiles (or converts) Miniscript to Bitcoin Script, which is what the code ultimately needs to be written in to successfully lock up real bitcoin with these extra restrictions.
Tier Three: Minsc
Minsc is the third tier of the cake. It builds on top of Miniscript, taking advantage of its security properties but creating a language that is even easier for developers to read and think about than Miniscript.
“Minsc’s focus is on usability and making it easier to express, comprehend and reason about scripts, using a simple and familiar syntax. It adds additional convenience features and ‘syntactic sugar,’” Ivgi told CoinDesk.
“Syntactic sugar” is a programming term for adding into a language another easier, shortcut way of executing a task that is usually harder to write.
So Minsc doesn’t add anything new to Script, it just makes it easier to use.
“It doesn’t let you do anything that Miniscript doesn’t already, similarly to Miniscript itself in relation to Bitcoin Script,” Ivgi said.
Bitcoin Smart Contracts And Minsc: Where Will They Go Next?
Minsc could make it easier for developers to add support for various smart contracts. “The main intended target audience is developers looking to build apps that utilize Bitcoin Script in interesting, advanced ways,” Ivgi added.
If more developers can eventually add support for these smart contracts, more users will (perhaps even unknowingly) be able to use these more-complex contracts as well.
“Initially, however, I anticipate the usage to be primarily experimental and educational. Minsc can be a great tool for people looking to gain a better understanding of Bitcoin Script, as well as for educators teaching the technical aspects of Bitcoin,” Ivgi said.
Ivgi is still in the process of adding other features to the language. Bitcoin’s smart contracting abilities are likely to expand even further, such as with Taproot, a likely upgrade on Bitcoin’s horizon. Minsc will be there to make these contracts easier to create.
The Yam Protocol Will Migrate Old Tokens To An Audited Contract
The saga continues…
After the original Yam Finance protocol collapsed due to a single line of code, its developers are planning to relaunch the project on new, audited smart contracts.
In a blog post published on Friday, the developers outlined a migration plan that will see the already existing tokens get transferred on a new smart contract with a properly functioning rebase.
The relaunch was announced shortly after it became clear that a last-ditch effort to save the protocol failed on Thursday.
Now, details on the upcoming transition have emerged. The migration will happen in two stages, and includes an initial Yam V2 contract that will store information on previous balances. Users will need to burn their V1 tokens and mint new tokens before an unspecified deadline. This transition contract will not be taking rebases into account, so the amount minted will depend on the underlying share of total supply of the tokens.
The transition contract will not have governance features, but will instead use off-chain signature-based voting to let the community express its desired path forward.
The most likely path is the deployment of fully audited V3 contracts, which will be the actual relaunch of Yam. No timelines were given on this yet, though the team said that specific information on audits will be provided in the coming days.
Once the contracts are deployed, the team will “strongly advocate” for rewarding all token holders who “acted to save the system.” It will be up to the community, however, to decide if the plan is worth pursuing and submit the appropriate governance proposal.
This could result in an interesting political conundrum for the nascent community, depending on what percentage of holders delegated their tokens to save the protocol. If they are a majority, they could force the decision through at the expense of the non-participating holders. If they are a minority, this decision would require altruism from the remaining holders.
Record Ethereum Network Use And Gas Fees Pose Risk To DeFi Expansion
Ethereum network use and transaction fees are rising to record highs, will this interfere with DeFi’s current expansion?
The number of Ethereum network transactions more than doubled in 2020 and is now virtually identical to the January 2018 all-time high.
As shown on the chart below, the number of transactions doubled in the past six months to stand at 1.23 million per day.
This situation might seem very bullish at first, but one must remember both EOS and Tron (TRX) started as ERC-20 tokens before launching their own mainnet and running fully independent blockchains.
A similar chain migration is happening on Tether’s USDT, a stablecoin which recently secured a $12 billion market capitalization.
Tether was created under the OMNI protocol, which runs on the Bitcoin network and most of the USDT tokens were moved to the Ethereum network to avoid increasing Bitcoin (BTC) transaction fees.
Ethereum 7-Day Average Transaction Fee
As Ethereum fees rose throughout 2019, a similar movement happened over the past year, as some Tether (USDT) holders opted for the Tron network.
This occurred while median Ethereum transaction fees increased threefold to $0.14 in July 2019, although this seems insignificant compared to the current $3.
The Tron network currently holds half the amount of USDT under ERC-20 and it will likely increase its share, considering the recent Ethereum network fees.
For comparison, USD Tether was dominated by Omni in August 2019, while Tron represented less than 3% of its market capitalization.
It is worth highlighting that USDT is currently circulating in EOS, Liquid, Algorand, and Bitcoin Cash SLP networks, although on a much smaller scale.
Can Ethereum-Based Networks Survive Surging Transaction Fees?
To better gauge the odds of additional outflow from the Ethereum ecosystem, one should analyze what kind of transactions are taking place. Stablecoins, for example, have fewer incentives to withhold during periods of network constraint.
On the other hand, switching networks on DeFi applications such as Maker (MKR) and Compound (COMP) seem less obvious.
Competing smart contract platforms have their disadvantages, and a much smaller ecosystem, as reported by Cointelegraph.
Etherscan data shows growing use by Decentralized Finance (DeFi) applications on the Ethereum network, but how sustainable are those numbers considering the current fee levels?
Data from DefiPulse shows that the total value locked in DeFi grew an impressive five-fold over the past 90 days. While this is astounding, exactly how many of these Ethereum transactions are related to this figure?
According to Etherscan data, yearn.finance (YFI) averaged daily 3,400 transactions in the past week with 15,700 token transfers.
Considering its $5,175 price over that period, each transfer was worth $23,900 on average, meaning a $3 fee increase should not be an impediment.
To ascertain whether YFI is an outlier, one should analyze Synthetix Network Token (SNX), another DeFi contender among the top 20 most active Ethereum contracts.
As per the above chart, SNX averaged daily 2,800 transactions past week with 8.3 million token transfers. Considering its $4.70 price over that period, each transfer was worth $13,900 on average. This is yet another indication that no exaggerated impact was caused by increasing Ethereum network fees.
What About Oracles?
Chainlink (LINK) is the largest token aiming to provide oracle solutions, and despite being interoperable on multiple chains, it’s indeed an Ethereum ERC-20 token.
Its increasing usage seems to be behind an impressive 88% surge over two weeks, as reported by Cointelegraph.
LINK averaged 35,000 daily transactions in the past week and 34 million token transfers. Considering its $13.40 price over that period, each transfer was worth $13,000 on average.
This analysis is another positive indicator that despite the recent Ethereum network increasing fees, some major oracle and DeFi applications will be able to withstand it, at least momentarily.
Not Every Smart Contract Can Thrive With The Current Fee Level
The Ethereum network’s rising fees have been accelerating second layer solutions development on some DeFi applications.
Although the overall impact for Ethereum might be positive, as it might prevent the migration of applications to competing networks, it certainly does not paint a good picture for investors and the general public.
Ethereum 2.0 development is under immense pressure to deliver a network which is better able to address the rapidly growing demand from stablecoins, oracles, decentralized exchanges, and DeFi.
The most important question to ask now is will the current Ether (ETH) holders and the network developers adapt to the current constraints?
The answer to this might depend on what competing cryptocurrency networks can offer, so in addition to tracking Ether price, wise investors should also monitor the network’s activity closely.
Decentralized Exchanges Maturing, But High Demand Reveals Limitations
The growth of decentralized exchanges in 2020 has been phenomenal, but there is a hard ceiling with current technology.
Decentralized exchanges, also known as DEXs, have risen significantly in popularity since the start of 2020, with both their user bases and volumes growing at an accelerating pace. The sector is currently being driven by so-called “automated market makers,” or AMMs.
In a nutshell, these exchanges do away with the traditional order book and custom price orders. Instead, an asset’s price is determined by a mathematical formula that depends on the relative share of the assets in liquidity pools.
When a user transacts, this changes the balance of assets in the pools and results in the price moving slightly higher or lower. This mechanism lets AMMs follow the price movements of the market.
Bancor was the first live implementation of an AMM, though many others such as Uniswap, Balancer, Mooniswap and Curve later built similar systems. Yield farming and the subsequent decentralized finance boom has helped propel daily volumes to more than $400 million.
Matthew Finestone, head of business development at layer-two decentralized exchange Loopring, told Cointelegraph that AMMs “have product market fit,” a term applied to startups that are finding traction. But the current iteration of DEXs has a variety of issues that could severely limit the size of that market.
On-Chain Performance And Target Market
Ethereum-based DEXs are currently some of the largest gas guzzlers on the blockchain, contributing to gas prices rising to more than 250 gwei, while in quiet periods they can be as low as 2 gwei.
The skyrocketing gas prices suggest that the current volume levels are close to the maximum of what existing DEXs can achieve without completely barring average users.
The growth of AMMs was already a direct result of the relative slowness of Ethereum, as Finestone said: “[AMMs] found ways to effectively ’solve’ the fact that market makers cannot be placing quick, precision orders on Ethereum.”
But while some of these issues could be solved with better on-chain scaling, Paolo Ardoino chief technology officer at crypto exchange Bitfinex, told Cointelegraph that on-chain settlement could never compete with centralized matching engines:
“The current solution for decentralized exchanges, even if Ethereum grows and becomes Ethereum 2.0 and the transaction speed becomes, let’s say 10,000 transactions per second, will still be many orders of magnitude slower than one single centralized exchange.”
Explaining why, Ardoino added that the issue with on-chain settlement “is just the speed of light.” When nodes across the globe have to agree on a single block, no networking improvement can beat the performance given by, for example, co-locating trading infrastructure in the exchange’s data centers. These performance limitations could be a serious hindrance to professional traders, especially high-frequency trading companies.
Dan Matuszewski, co-founder of trading firm CMS Holdings, recounted his experience of using DEXs on Twitter: “First off the experience sucks, in no way will you convince me it doesn’t suck, I won’t have it.” Elaborating on the point, he said that DEXs are expensive and the terms of a transaction are not clear until after it settles.
“I could be paying 5% bid offer [spread] and have little idea,” he added, though he noted that in the current environment, it’s “not that big a deal.” The relatively slow speed of execution, on the other hand, was not a major issue for him.
Nevertheless, Matuszewski told Cointelegraph that DEXs are not currently suitable for professional traders. “It’s for small ticket hobby traders to punt around on,” he said.
A further issue is front-running. Due to the completely transparent nature of the blockchain, a class of front-running bots exists to place favorable trades in the window between the submission of a transaction and its inclusion in a block. While they are generally used for arbitrage, this approach may also be used to take advantage of upcoming market moves.
A November 2019 study published in Cryptoeconomic Systems analyzed the effectiveness of Uniswap as a price oracle.
While the conclusion was largely positive, the researchers relied on the presence of arbitrage agents who would be motivated by profit to bring its price in-line with the rest of the market. Mikhail Melnik, a developer at DEX aggregator 1inch, told Cointelegraph: “Current AMMs will definitely be ineffective without arbitrageurs, because arbitrage is being used as a price discovery mechanism.”
Thus, the most popular DEXs today cannot be useful without the presence of markets based on order books, which currently are largely centralized. Furthermore, the arbitrage mechanism results in the issue of impermanent loss, which siphons a significant portion of the profits away from liquidity providers.
Some of the issues in AMM exchanges can be resolved without fundamental alterations. Solutions to fix impermanent loss are currently deployed by Bancor V2 and Mooniswap, the DEX developed by 1inch. Both attempt to limit arbitrageurs’ profits, with the former using price oracles and the latter a virtual balance that smoothens price changes over a five-minute period. According to 1inch, its solution has the added benefit of making front-running essentially impossible.
In terms of performance, Uniswap’s founder, Hayden Adams, sees the launch of smart-contract-enabled Optimistic Rollups on the Ethereum network as a way to improve throughput. The layer-two solution would create a generalized environment where Solidity smart contracts are executed outside of the blockchain. Uniswap could then be deployed in this environment with minimal changes to the code.
However, some have noted that Optimistic Rollups could worsen the front-running issue by only letting the operators see the transactions in advance. This would fundamentally defeat the goal of minimizing the need to trust operators, which is the core prerogative of generalized layer-two solutions.
There are currently few solutions to address the usability issues outlined by Matuszewski, though it’s possible that higher liquidity and specialized tools could help make these exchanges less expensive and more deterministic. Nevertheless, the lack of true price discovery is likely to remain. Melnik offered a potential solution:
“It is possible that some AMM designs that use oracles for these [price discovery] purposes will appear, but in my opinion, using oracles […] significantly worsens the problems with front-running.”
However, this would not remove the reliance on traditional exchange mechanisms.
Noncustody As The Next Iteration
According to Ardoino, “The solution is always in hybrids.” In his view, the future of decentralized exchanges will feature full on-chain custody and clearing — the act of updating the accounts of two parties following a trade. But the settlement, or the actual order matching, will not be done on-chain, he added:
“You can have open-source matching engines that are not on-chain but are running on a thousand different nodes and they have their own small books, and aggregated they can represent a bigger book.”
Such an approach would maintain on-chain custody and keep off-chain — yet peer-to-peer — matching engines, solving the performance issues without losing out on the decentralization. “This is the type of resiliency where we need to be headed rather than trying to create everything on a single blockchain,” Ardoino concluded. Though the matching engines are not peer-to-peer, such solutions are already being deployed by platforms such as Loopring and DeversiFi.
Loopring relies on zkRollups, a layer-two technology where the computational workload is offloaded to an operator that has to submit zero-knowledge proofs that state its changes are valid. In Loopring’s specific solution, the data is submitted to the mainnet in compressed batches. Finestone claimed that this makes it “a centralized exchange that simply cannot do anything evil or mishandle user funds.”
However, this puts some limitations on the performance of the exchange, as according to Finestone, Loopring can process 2,100 trades per second. While that is much higher than on-chain DEXs, it is still well below the performance of a fully centralized exchange.
DeversiFi has higher performance at 9,000 transactions, but it stores the data off-chain in a “Data Availability Committee.” Both exchanges are noncustodial, though in DeversiFi’s case, users would need to rely on the committee instead of blockchain data to retrieve their funds.
Anton Bukov, chief technology officer of 1inch, pointed to similar solutions such as zkSync to combat latency and lack of performance. All layer-two systems are still largely in their infancy, and it’s likely that throughput could be improved in the future.
The matching engine is not a bottleneck in this case, as Finestone revealed that Loopring uses conventional cloud computing providers such as Amazon Web Services and Google Cloud Platform. Some proposed DEXs such as Serum and Vega are still implementing on-chain matching, but they use higher-performance blockchains.
Can Decentralized Exchanges Become The Standard?
Given the fundamental price discovery limitation of AMMs, they cannot become the primary trading venues for cryptocurrencies. On-chain settlement is currently a major bottleneck, but even massive scaling improvements are unlikely to be enough for all traders.
Noncustodial but centrally operated exchanges fix many of the issues with existing DEXs, but for now, they appear to fall short of the performance levels required to replace their centralized counterparts. They also could, theoretically, front-run their users, which is similar to centralized venues in that regard, as Finestone noted.
Compared with Optimistic Rollups, however, the operators are usually the exchanges themselves, which incentivizes them to not engage in foul play.
Finestone also believes that centralized exchanges will always remain useful, “mainly [for] those that desire ’legacy-style’ convenience of asset ownership, as well as wherever fiat is heavily interacted with.” In his view, an end state for DEXs would have them process two-thirds of the overall volume. Therefore, it’s possible that different types of centralized exchanges and decentralized exchanges could fill their own separate niches as the sector evolves further.
Bitcoins Are Being Tokenized Faster Than They’re Mined As DeFi Craze Continues
Since Sunday, 1,043 more bitcoins were tokenized through Wrapped Bitcoin than were actually created by bitcoin miners as the Ethereum-based decentralized finance (DeFi) boom shows no signs of abating.
* About 900 bitcoins are mined per day, given the current issuance rate of 6.25 bitcoins minted per block and the target 10-minute block time.
* At last check, nearly 31,000 bitcoins have been tokenized on Ethereum, according to Dune Analytics, 75% of which were minted by Wrapped Bitcoin (WBTC).
* Ethereum’s supply of tokenized bitcoins hovered below 3,000 until mid May when the rate of new tokens shot up.
* The rate of bitcoin tokenization signals the surging demand to use bitcoin in the burgeoning network of Ethereum-based DeFi applications.
* “WBTC continues to exhibit strong growth as demand for bitcoin in DeFi has exploded,” said Kyle Davies, co-founder of Three Arrows Capital, in a private message with CoinDesk. “I expect this trend to continue,” he added.
* In July, Three Arrows Capital minted its tokenized bitcoins through BitGo, the company that helped spearhead Wrapped Bitcoin in 2019.
* Within a year, WBTC will be a “first class asset” in the decentralized finance ecosystem, predicted Three Arrows co-founder Su Zhu, “just as USDC and USDT are now.”
A Community-Governed DeFi Platform Makes Crowdfunding Decentralized
A community governed DeFi project sets a new standard for crowdfunding.
Mantra DAO, a community-governed Decentralized Finance (DeFi) platform with a focus on staking, lending, and governance, has announced it has finished its initial membership offering on August 16. In total, the project has raised $5.9 million.
To make the crowdfunding more decentralized and prevent large investors from having too much control of the secondary market, Mantra DAO said it signed a digital Simple Agreement for Future Tokens, or SAFT, after completing know-your-customer activities with every single retail investor.
SAFT is an investment contract offered by cryptocurrency developers, normally only to accredited investors.
However, the project tells Cointelegraph that it is trying to “raise the bar” for crypto investment and set an example for future blockchain projects to be more accountable with investors’ funds.
These investors have legal claims and protection with their investments for the first time in crypto or blockchain space. It explained that:
“Electronic signatures are valid under most jurisdictions and provide a very convenient, very transparent solution to retail investors protection. […] we issue a digital agreement via Docusign where the user inputs his wallet address and the amount contributed.”
The raised funds, according to the project, is in a licensed custodian company. The custodian company will be in charge of the fund accounting and keep track of “every single penny raised”. This will solve the dilemma of who controls the funds with the previous blockchain project, says Mantra DAO.
They concluded that these various measures are meant to put more pressure on the project itself to deliver what the project has promised on paper.
As Cointelegraph previously reported, the new Russian “crypto” law showed a regulatory regime for tokenized securities, yet had no regulation for cryptocurrencies. The SEC eased crowdfunding regulations amid the coronavirus pandemic.
Bitcoin Investors Swap For Ethereum ‘Wrapped BTC’ To Yield Farm And Chill
Demand for Wrapped Bitcoin has surged as Bitcoin investors seek a private method to gain exposure to DeFi and lend farming.
Demand for Wrapped Bitcoin (WBTC) has been growing tremendously in the last few weeks, with more than 23,100 WBTC ($274 million) currently in circulation.
According to data from FlipsideCrypto, a digital asset data provider, more than half of the WBTC was minted in the past month as the decentralized finance sector saw record growth.
Launched in 2019, WBTC is an ERC-20 token that is pegged to the price of Bitcoin (BTC). It allows users to seemingly transfer Bitcoin to the Ethereum network and interact with smart contracts.
To get WBTC, users must go to an authorized merchant who will hold the user’s BTC and exchange it for WBTC tokens. Merchants can mint and burn WBTC tokens as needed.
The growing demand for WBTC shows that Bitcoin users are looking for high-yield options to hold Bitcoin. According to a recent report by Genesis, a digital currency prime broker, institutional clients are also showing similar interest.
While there is growing interest in WBTC, its growth is also inflated by the yield farming phenomenon, as more than half of all WBTC in circulation is currently locked in DeFi lending protocol Compound.
Yield farmers value privacy
WBTC is by far the most popular Bitcoin-backed token used on the Ethereum network, but it is also a centralized option that requires users to go through a Know Your Customer procedure and to use a third-party custodian service. For some potential users, this raises privacy and censorship concerns.
While institutional interest around DeFi has been growing and even central banks are beginning to get involved, many users are individuals who may want to stay anonymous while using WBTC.
As such, the demand for renBTC, a decentralized and anonymous alternative to Wrapped Bitcoin, has been surging as well.
RenBTC is similar to wBTC but it features trustless storage for the Bitcoin being locked. This allows users to fully own their asset and remain anonymous in the process.
While not all DeFi protocols accept renBTC, this token can also be exchanged for WBTC and used to access DeFi protocols like Compound that only accept the latter.
According to Flipside Crypto, 19% of all new addresses using WBTC in August bought it through renBTC. This shows that privacy can indeed be a driving factor for more growth in the DeFi sector.
DeFi’s Potential Seems Limitless, But Can Ethereum Support The Growth?
As DeFi continues to grow, new security issues are arising. Not only have several DeFi protocols been subject to hacks and malfunctions, but the growth of yield farming itself could have consequences to the tokens involved with each platform.
For example, currently, more than 50% of all DAI is locked in Compound, which can disrupt its peg with the dollar. In the case of WBTC, more than half of its supply is locked in Compound as well. The continuance of this trend could easily bring liquidity issues for the tokens at hand.
Even more concerning is the fact that the Ethereum network is becoming increasingly bogged down by network congestion and high fees.
While it seems that the future for DeFi and all its related parts is limitless, the nascent sector requires a strong foundation to stand on.
At the moment, the cornerstone is the Ethereum network, but the question is: Can it sustain the growing number of smart contracts and demands being placed upon it?
No Collateral Required: How Aave Brought Unsecured Borrowing To DeFi
Unsecured borrowing has come to decentralized finance (DeFi).
Aave, a DeFi money market that allows users to earn interest on cryptocurrency and borrow against it, introduced credit delegation in early July. This service allows someone with a lot of collateral deposited on Aave and no desire to borrow against it to delegate their credit line to a third party they trust.
In return for essentially co-signing a loan to the trusted third party, the delegator gets a cut of the interest, juicing the return on their deposit.
The development represents a significant shift for DeFi lending, which until now has been predicated on only one of the traditional “four C’s” of credit: collateral. That’s to be expected when lending funds to complete strangers on the internet.
Credit delegation is a step toward basing loan decisions on other factors, such as the borrower’s income, savings or track record of repaying debts (“capacity,” “capital” and “character” in the old banker’s formulation).
The step change comes at a time when DeFi is all the rage. On Aug. 15, Aave alone crossed over $1 billion in crypto staked to the overall platform, as measured by DeFiPulse. At present, nearly $7 billion worth of digital assets are staked as collateral fueling this new industry. Only four projects (MakerDAO, Compound, Aave and Curve) have had over $1 billion worth of assets staked at one time.
“We are locking a lot of funds into DeFi,” Stani Kulechov, Aave’s CEO, told CoinDesk in a phone call. “We are looking at: How can we utilize that value as much as possible?”
On Aave, Kulechov said, around 75% of users aren’t using their credit lines. They are just earning interest on the deposits (and governance tokens).
While it’s natural to think in terms of person-to-person lending here, Kulechov said credit delegation is aimed more at institutional-level use cases and sophisticated, price-conscious trading outfits that need options for fast and easy credit.
These include over-the-counter desks, market makers, traditional financial institutions looking to borrow stablecoins to trade into fiat for analog-world lending or smart contracts set up to run specifically delineated strategies.
The idea is not that Aave itself becomes the lender but that users with capital earning returns on Aave increase those returns by sharing their credit lines.
To be sure, this is a well-worn road in the traditional world that expands opportunity for many but gets people (sometimes a few, sometimes a lot of them) into trouble.
“I think it’s healthy and natural to experiment around these models. But they do have a lot of risks around them, for obvious reasons, if the assets can’t be recovered in time for the primary owner,” Joseph Kelly, CEO of Unchained Capital, a company that writes loans against bitcoin collateral.
So how does credit delegation on Aave work? Here goes.
Without Collateral, What’s Backing The Loan?
Basically, relevant laws and contracts.
Aave provides access to OpenLaw contracts that allow the entity with the credit line to set up terms for their counterparty to agree to. They can turn to arbitration or the courts in the event of a default.
It’s up to the collateral holder to decide which specific requirements to make of those they delegate to. The nice feature that OpenLaw provides, though, is reflecting the contract terms directly in the smart contract that governs the relationship.
“I think the OpenLaw contract was just to show the possibilities. At the end of the day you can decide how to do it,” Kulechov said.
How Do The Deals Get Arranged?
Right now, the Aave team is doing it and so far it has only done one, for Deversifi, an exchange. “They are market-making,” Kulechov said, explaining why an exchange would need to borrow funds.
In other words, this first deal is a long way from a consumer getting an unsecured loan to cover a medical bill or buy a washing machine. It reflects the vision for the services that it will provide liquidity sources to entities that can be verified as worthwhile credit risks.
Aave has not disclosed who delegated the credit to Deversifi.
What we see today in the credit delegation is only a minimum viable product, Kulechov explained. “Now we kind of match the delegators and the borrowers,” Kulechov said. In other words it’s Aave that promotes the project to people with large deposits and then finds suitable counterparties.
This hands-on process is not scalable, however.
So Where Is It Headed?
This is where tokenomics, or in this case Aavenomics, comes in.
As Aave decentralizes, the vision is that the holders of Aave’s governance token, AAVE, would begin handling the scaling of credit delegation. Users would set up pools (vetted and approved by the AAVE holders) where they would seek out entities looking for liquidity options and assess whether they were good credit risks.
Then delegators could look at those pools and decide whether to delegate to them. It would always be up to collateral stakers whether or not they wanted to delegate their credit and whether or not the risk profile of a specific pool was attractive.
“Basically we make it more scalable so we don’t need to match these deals,” Kulechov said.
Kulechov believes DeFi could become a very attractive source of liquidity for use cases even outside of crypto.
“The idea is that this credit delegation could become a wholesale debt market. Which means if you are a facility in DeFi, CeFi, traditional finance, you could source part of your liquidity from Aave,” he said.
Meaning even online lenders that are making loans to regular people in the real world might borrow stablecoins on Aave and convert them to fiat to lend, because Kulechov believes that DeFi will be able to beat interest rates on liquidity sources they usually use, such as private placements and bonds.
This has yet to be tested, but it’s the future Aave is eyeing with credit delegation.
How Can Delegators Manage Default Risk?
Mainly by carefully vetting the borrowers they allow to use their credit lines, or “underwriting,” as bankers call it.
But for additional protection, another relevant project is Opium, which announced Saturday it had created a credit default swap (CDS) on the Aave protocol. A CDS is a contract that insures the buyer against a third party defaulting on a loan. The seller collects a premium and in return stands ready to make the buyer whole for potential losses on the loan.
In addition to risk management, CDS can be used for speculation by parties uninvolved in the loan, and these instruments are best known for their role in the 2008 financial crisis. Over the weekend Opium’s announcement elicited no shortage of snarky “what could go wrong?” reactions on crypto Twitter (which also made light of the project’s name). To be fair, some argue that CDS provide markets with an early warning signal of credit problems.
What About The Thing With Mortgages?
This is still a work in progress, but the vision is that RealT would tokenize home equity. Then AAVE holders could vote to accept those home equity tokens as collateral on Aave.
If that happens, it would mean both that people with home equity could potentially have a modest way of earning a small return on it and that they could also use it as a home equity line of credit. Obviously this could be quite dangerous, as MakerDAO users learned last year, when users took out personal loans for real-world needs only for the interest rates to spike when the system was tested for the first time.
That said, Aave has mechanisms for lending at stable interest rates. Regardless, new industries just need to take these shots, Kelly said.
“I don’t think there’s a time when it’ll be obvious that the market and technology are mature enough to try these models out,” he wrote. “There will be some that implode, either due to credit mismanagement (if centralized) or technology and market issues if decentralized.”
Kulechov made a similar point.
“I think innovation should not wait. If you have the ability to get it done, I think you should get it done. But I think always we need to be aware of the risks,” he said. “We definitely need to go slowly and securely.”
Originally known as EthLend, Aave was funded by a $17 million initial coin offering in November 2017. The team has not released a timeline for the release of version 2.
Another DeFi Exit Scam Just Made Off With $20M In Investor Funds
Is DeFI unravelling, or are these just growing pains?
The rapidly expanding DeFi space is becoming riddled with scams as another suspicious project has headed for the exits carrying speculators’ money.
“A new liquidity mining pool DeFi project, Yfdexf.Finance has exited the market after defrauding investors of $20 million in total funds locked in its protocol,” media outlet ZyCrypto wrote on Sept. 10.
The project shilled its vaporware hard via Twitter and messaging apps such as Discord over the past 48 hours, ZyCrypto detailed. Cointelegraph tried tracking down details of the effort, but all traces of the scam appear to have been deleted at press time.
The DeFi space has moved incredibly fast in 2020, especially in recent weeks, with projects such as SushiSwap seeing millions of dollars in action only days after its launch. Some such projects, however, have proven to be problematic in a variety of ways.
DeFi Platform bZX Sees New $8M Hack From One Misplaced Line Of Code
bZX made all the right moves, but it wasn’t enough.
The Fulcrum DeFi protocol developed by bZX, which had recently relaunched after a series of hacks in February forced the team to regroup, was hacked once again to the tune of about $8 million.
According to the incident disclosure by bZX, the culprit is one line of code placed at the wrong location in the contract for its “iTokens,” the token representing a user’s share in the pool of supplied assets — essentially a tokenized deposit balance.
A fix was quickly deployed to prevent further occurrences. As Anton Bukov, chief technology officer at 1inch.exchange highlighted, the fix simply moved one line of code several positions below.
The bug duplicated tokens when a user sent a transaction to themselves through a particular function. Under the hood, the contract simply subtracts the value of the transaction from the sender’s and adds it to the receiver’s. The contract created temporary variables representing the initial balances of the sender and receiver, and used those to update them.
In the case when the receiver and the sender are the same, however, the subtraction occured after the initial balance variables were set. This meant that the subtraction had no effect, so the attackers could simply create new tokens at will.
The duplicated tokens were then redeemed for their underlying collateral, with the hackers now “owning” a much higher percentage of the pool that let them drain 219,199.66 LINK, 4,502.70 Ether (ETH), 1,756,351.27 Tether (USDT), 1,412,048.48 USD Coin (USDC) and 667,988.62 Dai (DAI) — a total of $8 million in value.
The bZX team told Cointelegraph that the hacker returned the money on Monday, saying, “The attacker was tracked and identified due to their on-chain activity, he came forward shortly after this and returned the funds stolen.”
Past experience led bZX to create an insurance fund to cover for these “black swan events,” and the stolen coins were thus debited on the fund, which receives 10% of the protocol’s revenue through interest rates. Nevertheless, the Fulcrum protocol was left with just $6 million in total value locked after the incident.
Repaying that debt may thus require a significant amount of time, and is predicated on the protocol achieving success despite suffering these bugs. The bZX team made a hard commitment to secure practices with multiple audits from Certik and PeckShield, as well as a reinvigorated bug bounty program.
That appears to have been insufficient, which highlights that creating a secure DeFi protocol is harder than it may seem.
Regulatory Risks Grow For DeFi As A ‘Money Laundering Haven’
DeFi could fall under regulatory pressure if it is seen as a haven for money laundering.
The rapid growth in decentralized finance and yield farming is likely to attract greater regulatory attention according to a recent report.
A joint research paper by global management consulting firm BCG Platinion and Crypto.com has indicated that the rapid growth in DeFi in 2020 has created the potential for money laundering which will bring it under the radar of regulatory authorities.
Since the beginning of the year, the dollar value of crypto collateral locked across DeFi platforms has increased over 1200% to reach $9 billion according to data provider DeFi Pulse.
DeFi by design is permissionless and decentralized which means, unlike centralized exchanges, there are no KYC (know your customer) requirements for users. It operates largely beyond the realms of government and regulatory control which raises concerns about illegal access to financial services according to the report.
Commenting on the report in its newsletter, Ciphertrace noted:
“Since DeFi protocols are designed to be permissionless, anyone in any country is able to access them without any regulatory compliance. As a result, DeFi can easily become a haven for money launderers.”
DeFi protocols believe they can escape the threat of regulation by moving to full decentralization including governance, meaning regulators would be unable to shut the platforms down even if they wanted to.
However the scale and governance of DeFi protocols varies greatly in terms of full decentralization. Some protocols, such as Uniswap, have had substantial venture capital backing by highly centralized corporations, Andreessen Horowitz and Union Square Ventures in this case.
There is a fear global regulators could turn their attention to DeFi as it grows in scale. This may involve using decentralized identity and address checking services in order to blacklist certain users.
Fiat also needs to enter the ecosystem at some point, which is usually via traditional centralized exchanges which are increasingly regulated. Financial Action Task Force (FATF) regulations include the ‘Travel Rule’ which requires Virtual Asset Service Providers (VASPs) to collect and transfer customer information during transactions.
This may end up with the mass whitelisting and blacklisting of blockchain addresses associated with certain tokens, exchanges, protocols, and even users. If fiat onramps, such as centralized exchanges, are prevented from transferring crypto to DeFi-associated addresses, then DeFi protocols may be forced to adopt KYC and other regulations.
The research noted that the current FATF recommendation is that if the DeFi protocol is sufficiently decentralized and the entity behind it is not involved in daily operations, it may not be classified as Virtual Asset Service Providers (VASPs) and therefore will be immune from the Travel Rule.
But As Ciphertrace Noted:
“Judging by the current regulatory trends of greater KYC and other compliance requirements such as the FATF Travel Rule, DeFi could eventually fall under the scope of global regulators as it grows in scale.”
How Normies Are Getting Crypto-Rich With DeFi
Ethereum whales undoubtedly drive the decentralized finance (DeFi) movement, but many people making money on DeFi trends are just regular Joes, so to speak.
One such trader, who asked to go only by Joe, is a math student at a Canadian university. Just by playing with Ethereum software and his own calculations, he managed to make hundreds of thousands of dollars in 2020. This wasn’t his first rodeo, however; he’s been trading on decentralized exchanges (DEXs) for more than a year.
“I’m not a whale in the crypto world but I’m one of the top users of the DeFi protocol I use,” he said. “Before, when DeFi was smaller, there was a lot less competition.”
Since Weird DeFi’s food craze began, Joe said “high yields” are now available to newcomers “without a lot of technical knowledge.”
It’s impossible to say just how many rookie traders raked in unusually high profits during the YAM debacle in August, when an unaudited crypto experiment garnered $465 million in crypto then imploded within 72 hours.
One such anonymous YAM user, who said he rarely trades on exchanges, said he found the YAM trading game fun and relatively easy. He participated in the community vote to “save” YAM, then said he promptly “dumped” his tokens when he realized the software experiment was not sustainable. All things considered, he said he earned $15,000 from participating in YAM, having spent up to $800 on transaction fees.
For both of the above-mentioned DeFi fans, this is a life-changing amount of money. These users often rely on service providers to access the DeFi ecosystem. As such, traders weren’t the only winners of the Yam gambling game. Companies that run the Ethereum network also accrued traffic and transaction fees during the rise of Yam and Sushi, CREAM and now Pickle.
“I access farming and do most one-time things with MetaMask,” Joe said. “The only other [service] I use is the Web3 provider Infura.”
The DeFi mentality emphasizes open-source access to tools, services with low barriers to entry and distributed teams. Sometimes, this includes low barriers to entry for high-risk games.
According to Uniswap founder Hayden Adams in June 2020, most of the Uniswap ecosystem relies on ConsenSys infrastructure services, like Infura. This has also proven to be the common pattern for copycat DeFi projects like SushiSwap.
ConsenSys spokesperson James Beck said the Ethereum conglomerate restructured to make infrastructure and wallet services, like Infura and the DeFi-friendly wallet MetaMask, pillars of the company’s “core software business.”
ConsenSys’s head of product for Infura, Michael Godsey, said his team handled the “increased usage” from the food-themed yield farming spike, watching closely to understand “these new usage patterns.” Such DeFi experiments provide inspiration and research data for Ethereum startups, not chagrin.
In reference to the DEX tools people use to access these trading games, Godsey added, “Uniswap and MetaMask are two of our amazing customers and many yield farmers are utilizing their platform to participate in this new activity.”
As for Joe, the Canadian college student, he said he plans to keep stacking tokens because the broader DeFi movement is “sustainable and has been growing at a relatively slow pace for years.”
On the other hand, he said the trends over the past few months were heavily influenced by Compound’s token model. Joe reasoned these DeFi experiments might end in a “big crash” or slow fizzle.
“As long as risk-adjusted yield is higher than for other opportunities, I will keep using them,” he said.
DeFi Indexes Crash Despite Strong Fundamentals
Binance Futures’ DeFi Composite Index has lost half of its value since launching, while TokenSets’ DeFi Pulse Index is down by one-third.
On August 28, Binance Futures launched its DeFi Composite Index, a basket of DeFi tokens that initially comprised 27% Chainlink (LINK) and 11% Aave (LEND) alongside nine other prominent DeFi tokens that made up between 6% and 9.5% of the index each. Updated weekly, the index now tracks 19 different crypto assets.
However the Binance Futures’ DeFi index has dropped more than 50% from an all-time high of $1,189 on its first day of trading, with the basket now changing hands for just $507.
Indexes tracking decentralized finance (DeFi) tokens have taken a beating over recent weeks following the popping of August’s DeFi bubble.
On September 15, TokenSets launched its ‘DeFi Pulse Index Set’ (DPI) — which is composed of tokens from the ten-largest decentralized finance protocols by total value locked (TVL), according to DeFi Pulse. The basket is rebalanced on the first day of every month, with each token’s sizing adjusted according to “its relative circulating market cap to other positions in the index.”
Despite the TVL of the DeFi sector continuing to push higher, the DPI has shed nearly one-third of its value since launching — dropping from $130 in mid-September to test support at $90.
Other crypto market data aggregators are signaling that DeFi is down, with only 16 of the 100 tokens categorized as ‘DeFi’ on CoinMarketCap posting gains of more than 1% over the past seven days.
Messari’s screener tracking the performance of Ethereum (ETH)-based assets also suggests the DeFi sector is currently down, posting weekly and monthly losses of roughly 2%.
Despite the heavy price retracements produced by most DeFi tokens, the sector’s fundamentals continue to strengthen. DeFi’s TVL has increased by nearly 40% from $7.4 billion over the past 30 days, while decentralized exchange (DEX) Uniswap generated more than $15 billion in volume last month — more than top U.S.-based centralized crypto asset exchange, Coinbase.
YFI’s Andre Cronje Disappeared After ‘Death Threats’. Will ‘Love’ Bring Him Back?
Top Yearn Finance developer Andre Cronje has disappeared from social media due to ‘death threats’ — and now the community is posting ‘Love Letters’ to entice him back.
Yearn Finance (YFI) developer Andre Cronje has dropped out of public view after reportedly receiving ‘death threats’ from the decentralized finance (DeFi) community and becoming ‘demoralized’.
Cronje said he had received a variety of threats after investors raced into his unfinished and unreleased protocol, Eminence (EMN), which was then exploited and drained of $15 million in late September. The incident transpired while Cronje was sleeping, and he woke up to discover that half of the funds had mysteriously been sent to him by the hacker.
Cronje has not been active on social media since September 29, when he published his roadmap for refunding Eminence investors the $8 million. He noted criticism of the “public nature of this Twitter account and the public nature of my ETH address.”
As I am receiving a fair amount of threats, I have asked yearn treasury to assist with refunding the 8m the hacker sent. The multisig is safer and as such I feel more comfortable with them having the funds. Funds will be returned to holders pre-hack snapshot. https://t.co/wbputn5hYD
— Andre Cronje (@AndreCronjeTech) September 29, 2020
On October 9, fellow Yearn developer ‘banteg’ addressed Cronje’s silence, posting: “Andre said he won’t be Tweeting anymore. People got what they asked for.”
Speaking to Cointelegraph, banteg confirmed the threats Cronje had received were serious: “Andre has gone quiet because he has been receiving death threats.”
The developer noted that the actions of the DeFi community amid the Eminence fall out has had a significant impacted on how he views the community, stating:
“Crypto community at large has always been childish and irresponsible, which is the reverse of what Andre has been preaching. This witch hunt is something else, the last week has been very demoralizing.”
“I try to look through the noise and keep building, being around builders helps to level the energy sucked out by other people,” he added.
Cronje’s disappearance from social media has prompted the Yearn community to start a “Love Letters for Andre” thread to show their support for the developer. The thread has so far garnered more than two dozen posts in less than 24 hours. User ‘Wot Is Goin On’ wrote:
“We probably should be talking to our families but instead many of us are taking the time to write a message on a governance forum to a smart contract developer we’ve never met. There’s something special going on here and you kicked it all off.”
User ‘JarJar’ added: “This whole EMN thing was a blessing in disguise. Kill all the hype off, cleanse the community of some price obsessed degens and let the focus return to the building of products and long term community.”
YFI was one of the top-performing markets amid the Q 2020 DeFi bubble, with the token gaining more than 900% in the month of August alone to post an all-time high of more than $43,500 four weeks ago.
YFI has since shed two-thirds of its value, with the token consistently trending downward since the Eminence drama.
DeFi Traders Blame YFI Price Collapse On Shorting By Alameda Research
YFI price is still in a downtrend and many investors believe all attempts at recovery are being suppressed by Alameda Research.
Yearn Finance (YFI) price has been in a serious rut during the past 2 weeks and many in the crypto community blame the sharp correction on Sam Bankman-Fried (SBF), the CEO of Alameda Research and FTX.
In the past month, DeFi giant Yearn.finance’s native token YFI dropped 62.7% from $43,970 to $16,360.
As Cointelegraph has reported, the majority of DeFi tokens corrected 40%-60% in September and this sell off took place as Bitcoin and Ether (ETH) prices also dropped.
In the past 40 days, the price of Ether declined from $488 to $372, dropping to as low as $308. This weakness in the top-ranked altcoin by market cap further amplified the downturn of DeFi tokens.
Why Is Alameda Shorting YFI?
Throughout the past week, various reports emerged that Alameda Research has a short position on YFI.
Alameda, which describes itself as a quant trading firm, is recognized as one of the most successful crypto trading firms. In November 2019, Bloomberg reported that Alameda facilitates 5% of the cryptocurrency market volume, trading up to $1 billion daily.
On Oct. 11, SBF confirmed on social media that Alameda does have a short position on YFI. But, SBF emphasized that it did not crash the price of YFI.
According to SBF, Alameda placed a net 200 YFI short position. It is equivalent to around $3.28 million at a price of $16,400. Yet, the exchange executive said it was not enough to crash the price of YFI. He said:
“SBF borrowed YFI which destroyed its price, he sold it on Binance and other exchanges – only once he was caught, did YFI go back up’ False. 200 net YFI short over days does *not* destroy it! This is just off by an order of magnitude. The impact wasn’t huge.”
SBF also added that the YFI he “borrowed” on Cream, a DeFi protocol, was not used to short the cryptocurrency.
Much of the negative sentiment around SBF’s YFI short came from the speculation that he borrowed YFI to short it.
Bankman-Fried denied the speculations and explained that “most of the YFI was borrowed for liquidity and farming, not selling or shorting.”
For a firm in the size of Alameda, a $3.28 million position is likely a hedge against the market.
In the past week, Bitcoin and Ether have increased substantially while DeFi tokens were flat across the board.
Due to the trend of major cryptocurrencies outperforming smaller DeFi tokens, the YFI short could be a short-term hedge.
Is YFI’s Mega Rally Over?
YFI’s price is still down significantly from its peak of $43,966 but this doesn’t mean the project lacks strong fundamentals. Currently the team is preparing to launch its Yearn v2 Vaults, a major upgrade to its popular vaults. Once active, the vaults will allow DeFi users to earn yields by staking their tokens in the vaults.
According to Stats.finance, around $813 million worth of capital is locked in Yearn vaults as of Oct. 12.
Despite the upcoming product launch, the recent controversy involving former YFI supporter Blue Kirby, and the prolonged downturn in YFI price have some traders cautious about the future of the project.
DeFi Market Fall Showcases How Rising TVL Doesn’t Tell The Full Story
Could the DeFi market be a bubble as both market capitalization and indices crash?
The decentralized finance market seems to be deflating after the DeFi summer craze when tokenized versions of Bitcoin and protocols, such as Uniswap and SushiSwap, outperformed the rest of the market.
Earlier in October, the two main DeFi indices, Binance’s DeFi Composite Index and TokenSet’s DeFi Pulse Index Set lost more than 60% and 50% of their value, respectively. Meanwhile, total value locked in DeFi projects has been inching closer to its all-time high of $11.2 billion since late September.
DeFi Composite Index was launched by Binance Futures in late August, and it tracks the DeFi market performance using a basket of DeFi protocol tokens listed on Binance.
This index is denominated in Tether (USDT), using a weighted average of real-time prices of the basket of DeFi tokens on Binance which were selected. A rebalance of this index happens on a weekly basis where LEND was rebalanced in October due to it’s delisting.
DeFi Pulse Index launched by TokenSet selects the tokens from the top 10 DeFi protocols by TVL according to data published by Defi Pulse. This basket is rebalanced monthly as compared to the weekly rebalance done for DCI.
TVL is the value of assets locked in a particular DeFi protocol. It often serves as a metric for various DeFi sources to be the reference point for the amount of adoption and credibility of a DeFi protocol. However, it remains questionable whether TVL accurately measures the interest in the DeFi market.
Sam Bankman-Fried, the chief operating officer of FTX — a crypto derivatives exchange based in Hong Kong — told Cointelegraph that this value can often be artificially inflated by subsidizing users with airdrops, similar to what Uniswap did in September. He concluded:
“TVL is a pretty meaningless metric: (a) you can pay for temporary TVL with airdrops; and (b) as more capital gets comfortable with yield farming, more farms. But yield farming doesn’t support prices.”
Gregory Klumov, the chief operating officer of Stasis — an issuer of a Euro-backed stablecoin — told Cointelegraph that the period now referred to as “the DeFi summer craze” mainly benefited the tokenized Bitcoin, adding:
“Most of the BTC protocols being utilized for farming to get additional exposure to DeFi projects without losing exposure to BTC, which seems the most logical risk-taking activity for Bitcoin investors. The TVL increase can’t be the real indicator of the DeFi token valuation, which was clearly ahead of the product development phase.”
With most of the prominent DeFi tokens losing value in the double digits in October, the cumulative market capitalization for all DeFi assets also shrunk by 25% on Oct. 8 alone; the major losers were SushiSwap (SUSHI), Uni Coin (UNI) and Yearn.finance (YFI), dropping 50.9%, 38.2% and 31.3%, respectively. This reduction in the value of DeFi assets has translated to the collaterals locked in DeFi platforms as well.
Although this drop in metrics throughout the DeFi market might seem alarming to most investors, according to Klumov, it could also be viewed as a healthy correction where DeFi assets will now find their true value, adding that TVL should not be the go-to metric: “Since the market is maturing, more complicated metrics have to be established to properly identify winners and losers.”
Ethereum Transaction Fees
Along with DeFi, Ethereum transaction fees have also become a pivotal talking point within the crypto community. Transaction fees are the average cost of sending Ether (ETH) over the network. These fees reached their all-time high of $15.2 on Sept. 2 before spiraling down to $1.47 on Oct. 12. This fee is still higher than the $0.08 figure that was charged at the beginning of the year. A similar hike was seen on the Bitcoin blockchain back in December 2017 when the average transaction fee went over $50, causing the daily volumes and value of transactions to fall as well.
This spike in Ethereum traction fees resulted in miners making record transaction fee revenues for two months straight over Bitcoin, which held the top spot until now. The rise in fees seems to have deterred investors in the DeFi space, as it has raised the average transaction price for each transaction.
Meanwhile, Bankman-Fried pointed to the negative impacts that this increment has on DeFi transactions in Ethereum: “Volumes would probably be significantly higher if Ethereum had lower fees and higher throughput. That’s what makes me really excited about scaling solutions.”
Klumov outlined how the DeFi community, at large, has benefited from higher fees, while also lauding the Ethereum blockchain for coping well: “It raised the minimum ticket per transaction, which can compensate for the higher gas fees. That’s why other blockchains followed with their DeFi offerings, but most haven’t managed to generate enough traction.” He further added: “This is primarily because of the convenience and security Ethereum offers at the settlement level.”
The DeFi craze, combined with the high transaction fees, has caused the hash rate for the Ethereum network to hit its all-time high of more than 250 terahashes per second on Oct. 6, marking an 80% increase since January.
The hash rate refers to the computing power of the network, which acts as an indicator of the health and security of a blockchain. A high hash rate improves the rate of transactions and, in turn, the revenues made by miners on these transactions, resulting in Ether being three times more rewarding to mine compared to Bitcoin (BTC).
Is The DeFi Crash Similar To 2008?
Back in 2008, the traditional financial markets were rocked as a result of the complex nature of products such as collateralized debt obligations and mortgage-backed securities, which confused and misled investors into opting for schemes they knew very little about. It resulted in the markets crashing, sparking a global recession and eventually costing the American economy alone $12.8 trillion.
The complexities in DeFi are often of a similar nature where both the investors and the experts do not entirely understand how the DeFi markets function.
According to what Richard Red, research and strategy lead of the Decred digital currency, told Cointelegraph, “The complexity that results from the interactions of all these novel protocols means that it can be very difficult even for experts to know exactly what is happening.” He further added that “there was at one stage more Dai showing up on the Compound protocol than had been minted.”
While highlighting the similarities between the current DeFi crash and the 2008 financial crisis, it would also be important to note the differences between the two scenarios, especially from the perspective of investors, as Red said:
“Many people who participate in DeFi recognize that what they are doing is risky, but are enticed to take those risks by high rates of return on their locked assets. Another difference is the much faster speed at which the DeFi ecosystem is developing.”
In this context, DeFi contrasts sharply with the original crypto project, Bitcoin, which was motivated to build a system more resilient than the fiat economy. DeFi seems to have a different agenda wherein its degree of decentralization is being questioned due to the centralized nature of the oracles used in some of the protocols.
Thus, it may result in only the key players and whales having an opportunity to evacuate once the market starts to wobble or even indulge in practices that lead to big profits for them by causing the system to tip over.
What Yearn Finance’s ‘Blue Kirby’ Incident Means For Pseudonymity
Satoshi Nakamoto proved a pseudonymous founder doesn’t have to be a deal breaker. Blue Kirby, however, has reminded cryptocurrency investors that fake names can still be a red flag.
For those who didn’t spend last weekend on Crypto Twitter, Blue Kirby is the handle of a now-infamous figure in the decentralized finance (DeFi) community who appears to have absconded with some $1 million worth of ether (ETH).
As detailed in two worthwhile reads, DeFi community members allege Blue Kirby unfairly exercised influence over the Yearn.Finance ecosystem and then conducted a questionable initial coin offering (ICO) for a non-fungible token (NFT) marketplace called “Off-Blue.”
While the above sentence may sound to normies like so much word salad, the Blue Kirby fiasco marks the latest in a series of cautionary tales from 2020’s “DeFi Summer.” The episode shows how – absent compensating factors – permissionless technology, pseudonymous identities and borderless marketplaces can make a combustible mix.
Without skin in the game, Blue Kirby had little incentive to act in community members’ best interest in the long term, crypto industry members said. And without a real name, they now have little recourse.
Out of The Blue
According to Set Protocol’s Anthony Sassano, Blue Kirby created his online persona in the early summer months, riding on the back of Andre Cronje’s wildly successful robo-crypto hedge fund Yearn.
The pseudonymous token cheerleader quickly rose through the ranks of DeFi community members on Twitter as witnessed in community allocation of $7,000 per month for his tireless promotion of the YFI token.
Blue Kirby’s poor judgment came to light over time, beginning in late September with the botched release of Cronje’s Eminence, a new DeFi contract. Although Eminence had yet to be audited – as fits Cronje’s tagline: “I test in prod[uction]” – Blue Kirby encouraged users to deposit funds.
Some $15 million poured into the contract in no small part from Blue Kirby’s direction. Almost like clockwork, a hole in the contract was soon exploited an the attacker drained all the money While $8 million was eventually returned to YFI holders, Blue Kirby’s reputation took a hit.
Then, Blue Kirby doubled down by doing the unthinkable: he (or she, or they) sold their YFI tokens at $22,000 per coin for about $550,000 total.
Typically, selling financial assets is a personal decision. But that’s not the case in Weird DeFi where the proportion of token holdings to stylistic “pump it” tweets directly correlates to community acceptance (though this sentiment is perhaps not unique to any one part of the cryptocurrency market).
Selling YFI placed negative pressure on other community members’ token holdings, in turn earning Blue Kirby scorn.
The token has fallen some 25% since that time, to $16,889, according to Messari.
Blue Kirby concluded his three-month DeFi career with a play out of the old playbook: An ICO of his Off-Blue governance token.
The platform raised some $800,000 in ether before its NFT host Rarible shut down the marketplace on Oct. 10.
“People presumably understood that Blue Kirby was going to disappear with their money. This resulted in a lot of feedback we received from users, warning us about the potentially dangerous long-term impact of this sale,” Alexander Salnikov, co-founder and chief product officer at Rarible, told CoinDesk in an email.
Surprisingly, the ICO is currently offering refunds, but not before a public doxxing campaign went forward on the anarchic message board 4chan identifying at least one individual as the human face behind Blue Kirby. Attempts to reach that person for comment were unsuccessful, and it has not been conclusively proven that he is indeed Blue Kirby.
The Blue Kirby saga highlights yet again the challenges created by pseudonymity in cryptocurrency markets. Indeed, Chef Nomi of SushiSwap, shielded by an avatar, engaged in similar behavior in September.
Cryptocurrencies themselves were made possible only through anonymity or pseudonyms, Erik Voorhees, longtime bitcoiner and founder of exchange ShapeShift, told CoinDesk in an email.
(The identity of Nakamoto, the creator of original cryptocurrency bitcoin, has never been conclusively determined after years of speculation, and yet the asset remains the sector’s most valuable with a $216 billion market cap.) An identifiable leader, after all, is arguably a single point of failure for a technology that depends on having none.
If given a second chance, Voorhees said, he would consider starting ShapeShift anonymously.
“Being anonymous can be very helpful to a project, but obviously people should tread carefully before reputation is established,” he said. “The problem with Blue Kirby wasn’t that he was anonymous, but that he was new. The account came out of nowhere and people threw money at it.”
In other words, investors didn’t necessarily have to know the name on Blue Kirby’s birth certificate, but they needed to know something about the person other than that his handle was inspired by a Nintendo character.
“Fools and their money are soon parted, as they say,” Voorhees added.
DeFi designer Richard Burton told CoinDesk that DeFi projects and investors should look for long-term incentive plans for developers similarly found in startups.
“It seems that so many of the issues we see could be solved with simple vesting contracts. If you want to demonstrate your long-term commitment, prove it,” Burton said.
Voorhees and Burton’s sentiments were echoed by independent researcher and pseudonymous figure Hasu, who called pawns of Blue Kirby “victims of the halo effect” in a Telegram message.
As a pseudonymous community member himself, Hasu said that he has had “0 disadvantages” from his chosen angle of public interaction.
“People in this space generally evaluate you based on what you say and what you do. In general, I think, every successful pseudonymous account makes it even easier and more socially acceptable for those that come after it,” he said.