After a strong correction heading into November, decentralized finance (DeFi) tokens have rebounded strongly
DeFi assets bled out in late-October and earlier this month as capital cycled out of altcoins and into bitcoin. Though buying pressure has returned as the fundamentals of this space continue to improve.
Yearn.finance’s YFI, Synthetix Network Token (SNX), and Aave’s AAVE are among the cryptocurrencies that have rallied in excess of 100 percent from their lows. For instance, YFI traded $7,500 at its lows, though trades for about $17,780 as of this article’s writing. At the local highs, the token reached $19,000, as per OKCoin market data.
On-chain data and anecdotal comments suggest that there has been an influx of institutional capital into DeFi. Investors realized that the valuations many tokens were trading at last week were significantly undervalued by the standards of the summer rally.
Analyst Qiao Wang also likened the surge to a “game of chicken,” where a majority of investors were hesitant to accumulate DeFi on the way down but were quick to buy in once they saw the slightest flash of green:
“Recap of what I think happened. The mindshare of every informed alt player was on DeFi. But everyone was too afraid to buy on the way down. A game of chicken. Then everyone piled in on the first sign of strength. Today many are still in disbelief. But all mindshare is on DeFi.”
DeFi seems primed to continue its ascent as the fundamentals of this space are stronger than ever.
- Following bitcoin and ethereum higher, top DeFi tokens surged massively off their lows this week.
- LINK (Chainlink) is now trading on OKCoin.
- Institutions played a key role in this reversal, deploying sidelined capital into coins such as YFI and AAVE.
- Many DeFi coins such as YFI, AAVE, and SNX have gained 100% or more from their local lows.
- The fundamentals of the decentralized finance space continued to improve this week as the total value of cryptocurrency locked in DeFi hit $13 billion and nears $14 billion.
- Investors are keeping a close eye on the second-order effects of Uniswap’s liquidity mining scheme ending.
Total value locked in DeFi hits $13 billion
The total value locked (TVL) in DeFi contracts finally continued higher after weeks of consolidation this past week.
According to data from DeFiPulse, the TVL of this space has reached $13.52 billion, though reached as high as $13.86 billion on Friday. This metric was closer to $500 million at the start of 2020, accentuating this industry’s growth.
Uniswap currently has $3 billion worth of liquidity. Maker currently has $2.31 billion worth of deposits. And Wrapped Bitcoin has $1.99 billion worth of bitcoin locked. These three leading players in the DeFi space have been driving much of the growth seen in the TVL of DeFi contracts.
The institutional influence on the YFI and AAVE rebound
It appears there was an institutional influence that drove DeFi dramatically higher from last week’s lows.
As we mentioned in our DeFi update last week, Messari analyst Mason Nystrom found that Jump Trading, the Wall Street trading firm, had accumulated 47,000 Compound (COMP) in the span of a week.
The firm now owns over $75 million worth of Ethereum-based cryptocurrencies, though presumably holds many millions more in other coins. For instance, Nystrom mentioned that the company owns at least $32 million worth of Serum (SRM), the token of the Serum decentralized exchange. OKCoin is considering listing both SRM and the native token of the blockchain Serum is based on.
This week, Polychain Capital, one of the largest crypto-native venture funds, continued its journey of accumulating YFI.
The fund “publicly” accumulated its first YFI late in October, with on-chain analysts noticing a 330 YFI transaction from an exchange to its wallet. This continued this past week, with users of Nansen, a blockchain analytics firm, reporting similar transactions.
Nystrom reported that Polychain was sent another 240.8 YFI this past week, meaning the firm now holds nearly 2% of all of the coins in circulation. This means the firm has a considerable amount of influence over the direction of the Yearn.finance protocol due to the built-in governance functionality.
Adding to this, fund managers such as Kelvin Koh, partner at Spartan Capital, and Arthur Cheong of DeFiance Capital announced this past week that they have been accumulating AAVE.
Venture investors have taken a special liking to AAVE, calling it one of the DeFi space’s best long-term investments.
Aave launches V2 on testnet
Leading decentralized money market Aave this week announced the testnet launch of its next major iteration, Aave V2.
Aave is one of the leading gears in the DeFi ecosystem, allowing investors to obtain decentralized loans and allowing those with excess capital to earn a safe return on their idle cryptocurrency.
Aave v2 was launched to the Kovan Ethereum testnet. Aave v2 is focused on making the DeFi experience more efficient, both in terms of transaction costs and in terms of time spent using the contracts.
One key feature that is being worked on is the ability to swap debt and collateral from one cryptocurrency to another, allowing for further capital efficiency in the DeFi space.
Uniswap liquidity mining scheme to end; watch out for second-order effects
All eyes are on Uniswap in the week ahead. The decentralized exchange launched its UNI token in September, alongside a liquidity mining scheme where those that deposited liquidity into the platform would receive regular payouts in UNI.
This program worked to boost Uniswap’s liquidity, which has reached $3 billion as mentioned earlier in this blog.
But on November 17th, the liquidity mining scheme—or at least its first iteration—will come to an end. With over $2 billion locked in the liquidity mining scheme alone, investors have speculated that there will be second-order effects once UNI is not distributed to those that are providing liquidity.
DeFiance Capital analyst Daryl Wang did his best to analyze what he thinks will happen once this capital is deployed back into the DeFi wild.
Highlighting how ether (ETH) rallied on the day the liquidity mining scheme was announced, Wang believes there was a large amount of ETH bought for the sole purpose of being used to mine UNI. This means that a large amount of ETH should be sold, potentially for stablecoins or DeFi coins, once the scheme ends.
An influx of hundreds of millions of dollars worth of stablecoins, ether, and Wrapped Bitcoin into the DeFi market will likely drive coins higher and decrease the yields of DeFi yield farming opportunities.
MakerDAO to hit key milestone
MakerDAO is set to hit a key milestone in the coming days. DAIStats, a data site that tracks the decentralized loan provider, reports that the total amount of the DAI stablecoin in circulation is about to hit one billion for the first time. The number sits at 991 million as of this article’s writing.
Technically, the market valuation of all DAI in circulation has passed $1 billion, though that is because the stablecoin trades slightly above peg due to monetary policy decisions.
As aforementioned, the TVL of the MakerDAO protocol has seen a steep rally over recent weeks and months.
MakerDAO’s governors, who hold the MKR token, have decided to add collateral types to diversify the assets that back the DAI stablecoin.
DAI has played a key role in yield farming, which has resulted in this uptick in supply as well.
Bug causes unexpected Ethereum network split
A big cause of concern this week was the unexpected consensus bug that caused a temporary chain split in Ethereum, which left notable players on different sides for a number of hours. Here’s a condensed version of events.
Like Bitcoin and other blockchains, Ethereum clients run with slightly different code, depending on which provider you are using and which iteration you have installed. Often, this isn’t a problem: many blockchains are developed so that users can use old clients without updating. But, this became an issue this week with Ethereum.
Users of certain older iterations of the go-Ethereum and Geth this week were split from the majority Ethereum as code contained in new iterations activated, causing a divergence. While this would not have been a big problem if only inactive users were affected, key stakeholders in the Ethereum ecosystem were running these old clients.
Infura, a service that allows service providers to interface with Ethereum, block explorer Blockchair, the Ethereum wallet MetaMask, miners, and some exchanges were running these old clients. This meant that there was a large contingent of users that could not properly use Ethereum for a number of hours.
The issue was fixed after those affected updated their nodes.
Of note, those that didn’t update their nodes earlier did so out of safety concerns. Sometimes, it is optimal to run older versions as they are more stable than newer versions.
The issue here was that this change was not known to all users in advance. The fact that there were service providers such as Infura, which many top applications and exchanges use, not updated shows a lack of communication.
Blockchair’s lead developer Nikita Zhavoronkov has said that this debacle is the worst issue for Ethereum since the DAO attack four years ago:
“In my opinion, today’s consensus failure in #Ethereum shouldn’t be underestimated and should be considered as the most serious issue Ethereum has faced since the DAO debacle 4 years ago. An investigation is in order.”
This issue does not affect ETH2 directly.