A number of DeFi assets experienced correction as BTC surged, but fundamental developments continued, pointing to long-term momentum
Bitcoin continued its ascent this past week as covered in our latest Bitcoin Moves report. The leading cryptocurrency surged to year-to-date highs of $13,850 — just shy of the peak of 2019’s rally at $14,000.
Despite the strength in the price of bitcoin, ethereum and altcoins slipped lower. Tokens pertaining to decentralized finance (DeFi) were no exception.
For instance, Yearn.finance (YFI) has dropped from $13,800 to $11,700 as of this article’s writing. The leading DeFi token has been suffering from compressed yields offered in the space, which is a byproduct of yield farming tokens dropping in value.
Other DeFi tokens have experienced losses this past week. According to CoinGecko, Ren Network’s REN, Aave’s AAVE, and Uniswap’s UNI are among the DeFi tokens that have dropped in excess of 10% in the past seven days. Chainlink (LINK) and Compound (COMP) were the only two notable DeFi tokens spared from this correction.
Like last week, the dropping value of DeFi tokens was still underpinned by strong fundamental developments within the decentralized finance space that should trigger a recovery in the longer run.
There were also a few reasons to be concerned this past week, though. For one, a leading DeFi protocol called Harvest suffered an economic exploit that resulted in the theft of approximately $30 million in stablecoins. Also, it appears there is some inconsistency between developers over how prepared the network is for a release of Ethereum 2.0 — better known as Serenity or ETH2.
- Ethereum and DeFi tokens dropped this past week despite bitcoin setting new highs at $13,850.
- Analysts say that bitcoin managing to outpace altcoins is a result of the speed of BTC’s rally.
- DeFi continued to see positive fundamental developments this past week that suggest the long-term momentum of this space is positive.
- There were two key concerns this past week: a top DeFi protocol suffered an exploit while ETH2 was potentially delayed once again.
Fundamentals of DeFi remain strong
The fundamentals of the DeFi space remain strong despite weakness in the underlying market. Jeff Dorman, the chief investment officer of crypto fund Arca, supported this when he shared data from The Block showing a clear uptrend in DeFi.
The data shows that while UNI and AAVE have been “falling off a cliff,” the underlying protocols, Uniswap and Aave, are stronger than ever.
The percentage of decentralized exchange trading volume to centralized spot exchange trading volume is on track to hit 16% in October. In August, this figure was close to 7%, and months before that in June, it was closer to 3%.
Adding to this, the outstanding debt of the Aave protocol is nearing all-time highs at $280 million. This shows that decentralized finance platforms have become an increasingly preferable place for cryptocurrency investors to leverage their existing capital to obtain exposure to other digital assets.
Dorman noted that the data points show that DeFi tokens look “incredibly cheap” compared to where they were just months ago:
“I wouldn’t short CEFI. CEFI tokens are highly correlated to volumes and BTC prices, both of which are strong and going up… But yes, certain DeFi tokens look incredibly cheap — the market leaders.”
MyEtherWallet CEO and Founder, Kosala Hemachandra, commented in an interview with CoinRivet that he also thinks on-chain fundamentals show a bright future for this space:
“It’s easy to see these overnight or multi-day movements as a slowdown or to read too much into the market, but the reality is that DeFi is up over 1,700% this year in TLV. Price fluctuations aren’t unusual in new asset classes, and although DeFi’s certainly an experiment, it’s garnering interest that makes me immensely excited for its future.”
Analysts fear Ethereum tokens could decline further
Prominent analyst Qiao Wang commented that from how he sees it, DeFi tokens could drop even further:
“I constantly update my views and unfortunately it looks like there’s going to be more pain in DeFi. Originally I thought we won’t see an 80–90% crash which is typical of alts because of the level of sophistication of DeFi investors but that thesis is being invalidated.”
He specifically highlighted the weakness in YFI and AAVE, noting that losses in these two core assets will cause a “wealth effect” on smaller DeFi coins, resulting in further losses.
Wang’s comment comes a few weeks after Ari Paul, the CIO of BlockTower Capital, said that DeFi tokens were primed to see a parabolic correction of 80% before rebounding.
As previously mentioned, analysts say that the strong underperformance of DeFi relative to Bitcoin and “CeFi” tokens is a byproduct of Bitcoin’s rapid ascent. When bitcoin appreciates rapidly, all attention and capital are sucked out of altcoins. Case in point, billionaire hedge fund investor Paul Tudor Jones was not talking about DeFi on CNBC — he was talking about bitcoin.
Su Zhu, CIO and CEO of Three Arrows Capital, explained the phenomenon in a recent and somewhat controversial tweet:
“$BTC going up swiftly is not only not bullish for alts but it’s bearish. Reasons for this are myriad but boil down to the fact that money is a coordination game and Bitcoin is the Schelling point; this is independent of how you feel about it, community is literally irrelevant.”
Even putting all this aside, DeFi remains massively higher since May.
Pseudonymous analyst “Ceteris Paribus” recently pointed out that while BTC has jumped 60% since May 1st, coins like LEND/AAVE, Synthetix Network Token (SNX), UMA, and Loopring’s LRC have gained multiples, upwards of 400% to 500%.
YFI Founder Andre Cronje rolls out new project
This week, Andre Cronje rolled out his latest project. The developer, who is the mastermind behind Yearn.finance (YFI), published contracts for this project early in the morning on October 28th.
The new project is Keep3r Network, whose native token is KPR. The purpose of this new protocol is to allow developers, such as himself, to outsource certain technical tasks to “workers,” who can earn the KPR token for completing tasks. It is theorized that since Cronje has his hands full all the time with running one of DeFi’s biggest projects, he is looking to outsource some work.
KPR surged over 15,000% in the 12 hours after its launch. The token has an over $60 million market capitalization despite it just launching just over a day ago.
Aave completes governance transfer to decentralized model
The transition to a fully decentralized governance model for Aave that began a number of weeks ago has been completed.
This past week, Aave’s admins handed over the admin keys of the protocol contracts to governance contracts that are managed by holders of the AAVE cryptocurrency. This means that AAVE holders can now vote on proposals to influence the direction they want the protocol to move in.
OKCoin is looking into listing AAVE, along with a series of other digital assets pertaining to the DeFi space.
The Harvest Finance exploit explained
The biggest news in the DeFi market this week was the exploit of a large DeFi protocol called Harvest Finance. Prior to the attack, the protocol, run by anonymous developers, had over $1.1 billion worth of cryptocurrency under management. The attack resulted in an exodus of funds that has led to the total value locked in Harvest to drop to $320 million.
In reality, the amount stolen was “only” approximately $30 million worth of stablecoins, USD Coin (USDC) and Tether’s USDT.
Here’s a brief explainer of what happened.
Harvest Finance is a yield aggregator that uses multiple DeFi protocols to generate returns for its investors. Harvest’s contracts systematically farm certain tokens, then liquidate the tokens to distribute to investors in the protocol.
At the time of the attack, Harvest’s contracts were primarily utilizing Curve Finance to generate yields. Curve is a leading decentralized exchange for U.S. dollar stablecoins and wrapped bitcoin tokens.
The pseudonymous attacker generated a series of $50 million flash loans on Sunday evening, which are blockchain loans that require no collateral to be used. The loans were used to temporarily manipulate the price of certain stablecoins on Curve, which Harvest did not accurately account for. As a result, the attacker could systematically deposit and withdraw coins from Harvest while trading on Curve to manipulate how much he received from Harvest.
While the attack only affected depositors of USDC to USDT on Harvest for a total of 13.5% in losses, Harvest has seen a mass exodus of capital.
The issue here was that the smart contracts for Harvest were coded not to account for the short-term price deviations that the attacker triggered by trading large amounts of stablecoin on Curve. Harvest is looking to redeploy contracts with a certain function that will disable this price manipulation from taking place in the future.
Many see this attack as validation of Yearn.finance, which is the original yield aggregator. Yearn.finance does not suffer from the same bug because it accounted for this potential exploit.
ETH2 might have been delayed… Again
While some Ethereum 2.0 developers expected the upgrade to launch shortly, a new delay might be underway.
As first reported by CoinDesk, Ethereum Foundation researcher Danny Ryan said that the deposit contract for ETH2 is not yet ready due to a pending audit. The contract is expected to be launched six to eight weeks prior to the genesis of the Ethereum 2.0 chain. Commenting on the importance of the audit, Ryan said:
“This library is critical to creating keys, signing messages. Critical, in early phases, [means] that if you use this library, they need to be secure; if you use it to generate your wallets, it needs to have good randomness; and if you are signing your deposits which have a signature associated, it needs to be correct. Given how critical this library is, and given that, if there is a fundamental error in this library we could f*ck some sh*t up in terms of genesis deposits, that is the blocker.”
The deposit contract was expected to be rolled out last week, which would have put the planned Ethereum 2.0 launch date late in November.
New blockchain coming to the fore
Ethereum alternatives or competitors came under the spotlight this past week as a number of DeFi platforms announced moves to integrate themselves into other blockchains.
Leading decentralized exchange Balancer is looking to launch iterations of its protocol on two blockchains: Oasis and NEAR. Oasis is a privacy- and security-focused blockchain that has been invested in by Accel Ventures, a16z, Polychain Capital, and Pantera Capital. NEAR is a low-latency blockchain that is compatible with the Ethereum Virtual Machine.
Audius, an Ethereum-based protocol for artists, made a big move this week by revealing it will be migrating some of its functions to Solana. Their announcement read:
“To meet this growing demand, the Audius team specced or built proofs of concept with over 20 L1 and L2 scaling solutions. After this research, Audius has selected Solana — a high performance L1 blockchain capable of 50,000 transactions per second with costs as low as $0.00001 per interaction — to help scale the network.”
OKCoin is looking into listing Solana’s native token, SOL.