DeFi shows growth, but numbers may be deceiving

All you need to know about everything that matters | Week #46, 2020

The industry is full of excitement. Bitcoin continues to move higher and has breached the $15,500 level. DeFi tokens also made a bit of a comeback, adding some energy into the space.

Nevertheless, Ethereum’s ecosystem faced a major infrastructure challenge, forcing some to reevaluate the nature and the level of decentralization in the industry. The gaming and collectibles sector continues to develop somewhat in the shadows but looks to be starting to attract more attention in the industry.

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DeFi tokens have shown significant gains over the past week. The growth followed a period of decline that raised questions about the near term future of the sector. With the summer months feeling like a long time ago, the space may have been searching for some direction. New projects continue to appear, but there isn’t the same level of novelty excitement as when the food-meme projects first made their appearance.


So, it may have been encouraging for some to see the sector rebound. Moreover, MakerDAO reached a milestone of $1B Dai, and DeFi TVL rose by over $1B in a relatively short period of time. Still, while the numbers appear impressive it is important to consider them more closely.


MakerDAO continues to struggle with the Dai peg. As the market capitalization of the stablecoin increases the consequences of this may become more significant. A number of DeFi projects have suffered from algorithmic exploits and given that Dai is an algorithmic coin it may be more susceptible to both a direct attack and becoming a victim of a domino effect.

Given that the peg appears challenging to maintain even in the current conditions, it is unclear what would happen to stablecoin under significant stress.


The growth of TVL also raises some questions. Since TVL is highly susceptible to price effects, it is important to consider alternative metrics as well. For example, when TVL is paired with a 30-day aTVL, which factors out the price effect, it becomes evident that the recent move is price-driven.

When this is combined with relatively flat AUW, it paints a different picture of the recent events. With TVL being the primary metric used in the sector to describe projects, it may be used as a sort of marketing tool by the projects. If a project appears on TVL rankings’ lists it gets awareness in the space. So when headlines speak of growing TVL it is important to consider what that TVL actually represents.

The Geth debacle and the questions it raised

A quiet update in the Geth client caused a storm in the industry this week. A number of actors, including Infura, had not upgraded, and the resultant fork saw nodes go out of sync.

Infura provides API access to a wide array of applications and entities in the ecosystem, so this created a massive issue. Binance even halted Ethereum withdrawals for a period of time. The issue was resolved but brought up a number of concerns.

One of the key benefits of decentralization is the prevention of a single point of failure circumstances. However, when Infura went down if the industry wasn’t paralyzed it was significantly hampered.

Moreover, while the DAO has been trending at the dapp level, it appears that at the infrastructure level things appear to be highly dependent on specific entities.

As the Ethereum ecosystem is getting ready for Ethereum 2.0, it will be important to see how operational and communication processes are organized. With more capital being utilized on top of the infrastructure layer, issues may become increasingly costly.

Ethereum rivals not giving up

Ethereum’s competitors are watching as funds accumulate on the Ethereum 2.0 deposit contract. 


A recent article on Cointelegraph quoted Sam Bankman-Fried, reflecting the limited potential of Ethereum. Serum has been built on the rival Solana. The article further questioned if even Ethereum 2.0 would be sufficient for the future imagined by the FTX co-founder.

Balancer, a notable project in the Ethereum DeFi ecosystem that has completed a major fundraise through a token sale, has announced plans to offer its product on another Ethereum competitor, Near Protocol.

Moonbeam, a potential smart contract parachain in the Polkadot ecosystem, may significantly lower the migration barrier for Ethereum projects. By offering an Ethereum compatible environment, Moonbeam may be able to entice projects to try building on one of the most popular platforms outside of Ethereum.

More excitement from games and collectibles

Sorare has been able to partner with FC Bayern Munich. Fantasy sports may be niche, but a fairly sizable one, and one that is easily understood and thus accessible to a retail user. Such partnerships may attract fan user bases and given the relatively simple use case may serve as a gateway for new users into the ecosystem.


More from the gaming space, Binance has announced that it will list SLP in its Innovation Zone. Liquidity may be a key factor for the success of the play-to-earn model. If major exchanges start to list in-game currencies, it may not only attract more attention to specific games but also motivate publishers and developers to work on new games and concepts.

Axie Infinity is one of the better-known projects in the blockchain space. It has shown a willingness to experiment and evolve. Its project has been at the forefront of the play-to-earn space, its NFTs have been sold for significant amounts, its assets have attracted attention as sharded items, and it has even introduced a governance token.


It should be noted that Binance has started to restrict access to the exchange from the US. If Binance continues to expand its footprint in the gaming space, it will be interesting to see if and what effect these restrictions will have on the sector.

It will also be interesting to see if entities like Coinbase and Gemini will show interest in the gaming and collectibles space. It is unclear how these various assets may be looked at by the regulators, but it appears that the space is evolving.

NB: The information provided here is for reference and informational purposes only. This is not investment advice and should not be treated as such.

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