Week in Review | #41 | 2020
The DeFi market has seen prices retreat over the past weeks. The euphoria around the launches of new crypto products has been tapered off, and attention has shifted to NFTs.
There is still a lot of activity, but with the market as a whole being range-bound over the past month, the sector is waiting for the next catalyst. This could be a time for late entrants into the space to catch up and for incumbents to fix some nagging issues.
Prices and yields calm down
With indexes becoming popular in the industry it is easier to track macro progress in the industry. For example, the recently introduced Binance DeFi Index has been showing red the past month.
Expectedly, TVL numbers have responded to this pullback as well, as over $1B has been shaved off of the total. Still, the fact that the aTVL has been plateauing instead of spiraling down, indicates that the decline in TVL is driven by price fluctuations.
There do not appear to be signs of capital flight, which makes the current dynamic look like a pause rather than a decline.
Chasing high yields has become harder, and this has impacted even the industry leader yearn. The project is working on improving its vaults, to revitalize its platform.
Uniswap has also been feeling the autumn blues, as the price of UNI has been falling, as has trading volume on its platform. It will be interesting to see if its potential inclusion in a yEarn vault will help change the trend.
The routing question
The subject of impermanent loss has been widely discussed in the industry and a number of projects have made efforts to address the issue. However, while awareness for this issue was growing, it turned out another threat was lurking in the shadows.
Imperfect routing protocols on AMM exchanges can leave liquidity pools open to arbitrage attacks by bots. The issue was discussed in a post by DFOhub, which explained in detail, how Uniswaps V2 routing strategy created a vulnerability. Essentially, Uniswap is routing swaps through a list of “privileged pairs”.
The design choice may provide operational efficiency, but can result in a value drain for certain pools. This is a prime example of an issue that is not a straightforward error in the code but still creates vulnerabilities.
It is encouraging to see that the community is working to uncover these and propose fixes.
The DeFi space is getting crowded
Despite the fluctuations in prices more and more projects are entering the space. Now Tezos and Zilliqa have thrown their hats in.
Tezos is a top 20 project by market capitalization, and will now have an AMM exchange on its network. Dexter Exchange has started with a limited number of assets tzBTC, USDtz, and XTZ, and it will be interesting to see how much liquidity it will be able to attract.
Zilliqa, another Ethereum competitor, recently launched its own AMM ZilSwap. While the network has far less pull than Ethereum and many of its rivals, Xfers will launch a regulated digital Singapore dollar on it. This may create some additional appeal and opportunities for developing Zilliqa’s DeFi ecosystem.
The bitcoin to Ethereum trend continues to expand. With new projects like BoringDAO easing the flow of BTC to the network the TVL of the biggest cryptocurrency on Ethereum is bound to continue to increase. The total has already surpassed the $1B mark.
However, the trend of BTC coming to Ethereum is not new, and it is interesting that the flow of assets may start going the other way as well. The RSK ecosystem which leverages Bitcoin will now be introducing Dai via its RSK-Ethereum bridge. With projects like RSKswap and Sovryn, Bitcoin may start to see its own DeFi ecosystem forming.
Scaling remains an issue
With remaining a major issue on the Ethereum network, tools for estimating Gas costs, like GasNow may get more attention. Moreover, while Ethereum 2.0 continues to move towards its launch, layer 2 scaling solutions are coming into the spotlight.
The recent posting by Vitalik Buterin seems to point to a rollup powered near-term future. It will be interesting to see if this will be seen as an endorsement, and how that will impact alternative approaches to scaling on Ethereum.
It will also be key to observe if the implementation of different layer 2 solutions will impact the composability aspects of Ethereum’s dapp ecosystem, especially as it relates to DeFi.
The UX/UI aspects of dapp are extremely important for increasing the adoption of decentralized applications. This makes aggregators as well as easily integrated solutions very important to the industry’s growth. With MetaMask started to offer DEX aggregator features, it is clear that some projects are starting to seriously consider user needs.
Improved scalability should only improve on this, if it does not disturb the composability aspects of the ecosystem.
NFT continue to step up
Officially licensed collectible dapp NBA Top Shot has entered open beta. With the LA Lakers and the Miami Heat battling it out for the NBA championship users can collect awe-inspiring moments and trade them as NFTs.
The application is notable as an appeal to the mass market sports fan and memorabilia collectors. It is also the first dapp to be launched on Dapper Lab’s Flow blockchain. While a number of blockchain projects are trying to compete with Ethereum in the DeFi space, Flow may be the first serious challenger to its NFT crown.
On the play-to-earn front, Spliterlands will try to replicate Axie Infinity’s success with its Small Love Potion (SLP), with its Dark Energy Crystals (DEC). The token has been listed on Uniswap, and will have a liquidity mining component.
The gaming and collectibles space is slowly starting to incorporate features popularized by the DeFi sector. Going forward it would be natural to see more integration between the two.
Regulators send mixed messages
The recents comment from SEC Chairman Jay Clayton on the subject of tokenized stocks have brought back the “tokenize everything” slogan. While it is certainly optimistic that the SEC is starting to show an open minded approach towards crypto assets, the process may be a lot slower than many want.
For instance, the FCA has decided to ban selling crypto-related derivatives to retail customers. It will be important to note how the regulators will approach enforcement of these rules with respect to decentralized projects.
Regulators are trying to balance the need for monitoring and the ability to enforce laws with giving the industry an opportunity to flourish. The multitude of crypto scams and the ability to use DEXs for money laundering purposes makes this task difficult.
There is a need for clear regulatory guidance as it remains one of the biggest questions marks in the industry.
NB: The information provided here is for reference and informational purposes only. This is not investment advice and should not be treated as such.