A week of Bitcoin milestones and DeFi optimism

All you need to know about everything that matters | Week #51, 2020

This week has been full of milestones. Bitcoin has quickly broken through $20K, $21K, $22K, and then $23K, generating excitement and optimism throughout the industry. DeFi continues to make headlines, with both Ethereum and rival networks seeing growth. However, with the Compound vote and the Aave retrospective, there is much to be wary of.

Still, crypto art has arguably outshined DeFi, with headlines that demanded attention. The year is winding down, but the industry appears to be gearing up for an exciting 2021.

Source: CoinGecko.com

DAO not coming to the rescue

The proposal on Compound to compensate users affected by the liquidation event using COMP tokens failed. While there was some discussion on whether the idea of the compensation would set a bad precedent and whether the proposed compensation was enough, ultimately the overwhelming number of votes were cast against it.

Source: Compound

There are several issues here that are a bit concerning. The DAO concept was meant as a way to give the community ownership of the platform, but given that the number of voting addresses was limited to 52, and that many of them belong to other projects or funds, one must ask what constitutes the community and whose interest do the governance participants serve.

DAO has become a key element of many DeFi projects, but for now, teams focus on the token distribution mechanics rather than the actual voting dynamics. As more capital becomes at stake, who controls the voting and what motivates them, may play a much greater role in the development of the ecosystem

The wobbly foundation

While the DeFi sector continues to grow, the close calls are starting to mount. The fundamental issues of the lack of security and steady UX have still not been addressed, leaving projects and users vulnerable.

For instance, a bit of oversight has potentially cost a user over $50K in savings, as the immutability feature shows its ugly side. A user, allegedly accidentally, sent 4005 LINK to an Avegotchi contract that does not support operations for the crypto asset, effectively losing them. It is nice to see the community try to offer some support, but that is not a long-term solution. For the industry striving to achieve mass adoption, the lack of retail-focused checks and failsafe mechanisms may become one of the biggest hurdles to user growth.

Also, this week Trail of Bits has published a blog post detailing how they discovered a serious vulnerability in the recent Aave upgrade. The most concerning regarding the discovered issue was the fact that it was uncovered after the project was considered audited.

While it is great to see Trail of Bits voluntarily help out Aave, and the project’s team react quickly to the discovery, the situation raises a lot of questions. What are the auditing firms actually doing? What should they be responsible for? The potential domino effect that an exploit could create could be extremely damaging for the sector.

Growth on its own will not make these issues go away, it will only exacerbate them.

The DeFi race is heating up

The Ethereum ecosystem continues to mature. TVL has crossed $19B according to DeBank, and individual projects also find milestones. For instance, Hegic has achieved a $100M cumulative options volume. While it is an impressive adoption benchmark, it is also critical in terms of the project’s token economy. The project’s Phase I reward tokens begin to unlock when the $100M is crossed.

Source: Twitter

Derivatives may be the next frontier for Ethereum DeFi, with a number of projects like Auctus and Deriswap competing for the growing market segment. With the rival DeFi ecosystem still far behind, it may be a while before derivatives markets start to be significant on other networks.

Still, competing DeFi offerings are growing in numbers. Cardano is expecting Bondly to become its first DeFi project to launch, and now the second DeFi project to be associated with the network. Cardano may appear to have fallen behind in the layer 1 race, but its long-term strategy with a focus on Africa may pay off down the line.

Polkadot is starting to see IDOs appear, Polkastarter play host to MahaDAO’s ARTH and SpiderDAO’s SPDR. This token offering approach was at the center of Ethereum’s DeFi summer and may play an important role in the Polkadot ecosystem as well.

The Bitcoin ecosystem is also trying to keep pace. Sovryn has now launched its trading and lending platform on top of RSK, while RSK has proposed creating an RSK market on Aave. The RSK ecosystem has been in development for some time, and if it is able to attract the Bitcoin community may become an interesting contender in the DeFi space.

NFTs capture headlines

Crypto art stole the show this week. The biggest wave of excitement was generated by the massive NFT auction by Beeple, which netted $3.55M, with one of the art pieces going for an impressive $777,777. The auction was huge for the artists, the community, but also Nifty Gateway has established itself as a major player in the crypto art space.

The Gas question

With art and collectibles garnering more and more attention, and with games trying to leverage this excitement the question of gas is creaming up once more. Now with MegaCryptoPolis mostly migrated to Matic Network, the market will get to see the benefits and potential drawbacks of scalability technology in action.

Games have been hurt by high gas prices on Ethereum, and if the sector is to recover and move forward it will need to find a long-term solution for the issue.

The information provided here is for informational purposes only. This is not investment advice and should not be treated as such. Strategic Round Capital and/or the author of this report holds a position in BTC, ETH, HEGIC, and POLS.

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