Analysts remain bullish on DeFi as capital flows suggest the market is primed to move higher
Following bitcoin’s ascent to $18,700, leading decentralized finance (DeFi) tokens have continued to roar higher. After rallying over 100% from their October lows, leading DeFi tokens such as Yearn.finance (YFI) and Aave’s AAVE continued their ascent this past week.
Presently at about $28,500, it looks like YFI is reaching for $30,000, which would put it up 300% from its October lows. AAVE is setting new all-time highs at $80. Ethereum, too, has begun to rally as well. This past week, the second-largest cryptocurrency hit a new year-to-date high at $495, benefiting from an increase in deposits into DeFi and the ETH2 deposit contract.
We’ve seen an increase in DeFi usage this week, with gas fees starting to increase across the board due to the volatility and an increase in on-chain activity. Gas fees temporarily passed 100 Gwei this week on Tuesday and Wednesday—something that hasn’t been seen in weeks.
One concern, though, is the increasing number of exploits that have taken place over recent weeks. Over half-a-dozen DeFi protocols have experienced bugs and exploits in recent weeks that have resulted in the loss of millions in user funds. These funds often cannot be recuperated because blockchain transactions are uncensorable.
- DeFi tokens continue to rocket higher this past week, following bitcoin.
- Tokens such as YFI and AAVE saw multiple 10%+ days this past week, as did smaller DeFi players.
- Analysts are confident that the rally is not a dead cat bounce.
- This is partially due to the influx of institutional capital entering DeFi coins and positive technological developments.
- Ethereum Foundation researchers gave an ETH2 “AMA” on Reddit this week, giving an update on the long-awaited upgrade.
- DeFi investors can set up recurring buys for any DeFi assets on OKCoin.
Total value locked in DeFi hits $15 billion
The total value of coins locked (TVL) in DeFi continued to grow this past week, breaching $16 billion.
DeFi Llama, a new data source tracking TVLs, shared this milestone early Wednesday.
Five protocols make up a majority of the TVL: MakerDAO, Wrapped Bitcoin, Uniswap, Compound, and Aave. MakerDAO is a decentralized loan provider, as are Aave and Compound. Uniswap is a decentralized exchange for mostly early-stage Ethereum-based tokens. Wrapped Bitcoin is a service that stores bitcoin and mints a coin representing those deposits on Ethereum, wBTC.
The growth of DeFi is currently in a phase of exponential growth, according to Defi Llama. At the start of November, the metric was closer to $13.25 billion.
SushiSwap vs. Uniswap
A dynamic has begun to play out between Uniswap, the first widely-used decentralized exchange, and SushiSwap, the first fully-fledged fork of the protocol with a focus on community ownership.
SushiSwap launched just months ago with its own token, SUSHI, weeks prior to Uniswap launching UNI. This launch gave SushiSwap an edge over Uniswap, resulting in an influx of liquidity that actually allowed the exchange to temporarily surpass the platform from which it was derived.
This lead was only temporary as Uniswap launched UNI, reclaiming the lead. But as we mentioned in our DeFi update last week, UNI distribution has ended, at least temporarily.
SushiSwap took this opportunity to slide in, revamping its own SUSHI reward system to attract capital that was primed to leave Uniswap once UNI rewards ended. This decision has paid off thus far: SushiSwap’s liquidity has passed $1 billion for the second time in its history while Uniswap’s liquidity has dropped by an equivalent amount.
The loss of liquidity on Uniswap has yet to abate as SushiSwap’s rewards continue to outweigh the benefits of keeping capital on the original exchange.
Uniswap governors are currently discussing the need for another UNI distribution program, which should help stem the loss of liquidity and maintain UNI’s network effects for the time being.
Institutional capital continues to enter DeFi space
Institutional capital continues to enter the DeFi space despite a focus on Bitcoin within the cryptocurrency community.
Galaxy Digital this past week released its Q3 earnings report in which it divulged two direct investments in the DeFi space. The company put millions of dollars into two funds focusing on DeFi innovators: ParaFi Capital and Robot Ventures. Robot Ventures is a fund founded by Robert Leshner, the CEO of Compound Labs. Compound Labs develops one of the largest Ethereum applications, Compound.
On-chain data also shows that institutions have been accumulating decentralized finance-related coins.
During a correction this past week, Three Arrows Capital, one of the largest funds in the industry, deployed $10 million into Chainlink’s LINK token.
MakerDAO adds YFI as collateral
Both MakerDAO and Yearn.finance’s YFI token got a big boost this week when YFI was finally integrated as a collateral asset for the protocol.
This means that moving forward, users can mint MakerDAO’s native stablecoin, DAI, using YFI. This increases YFI’s utility and also only further accentuates the scarcity of the coin. Hundreds of YFI were immediately sent to MakerDAO upon the update, minting millions of DAI in the process.
This allows users who are bullish on YFI for the longer run to obtain a loan on that position. That loan, paid in DAI, can then be used as a yield farming tool, giving YFI holders another revenue stream.
Exploits upon exploits
This past week was not too pleasant for many DeFi users of smaller protocols.
Users reported a number of exploits taking place, which resulted in the losses of millions in user funds.
It began with Akropolis, a full-stack DeFi protocol that has a yield aggregator called Delphi. A yield aggregator in basic terms is a smart contract that maximizes the yields one can earn by lending and depositing stablecoins into different DeFi protocols. Yearn.finance’s Vaults are the most popular instances of yield aggregator products.
Last weekend, users began to notice a number of suspicious transactions involving Akropolis. $2 million worth of DAI was drained from the yield aggregator in all, and most pools were not affected by the exploit.
What had happened was an attacker found a bug in the protocol that allowed Delphi to basically give them pool tokens without depositing any liquidity. This is similar to paying someone with a cheque that will bounce.
Three days later, a Yearn.finance fork called Value DeFi also saw a hack. $7.5 million was taken in all, though $2 million of those funds were returned to the protocol as an act of kindness. This hack was different: the attacker used flash loans to manipulate the price of stablecoins on Curve to withdraw more funds than they deposited in Value DeFi’s primary product, the stablecoin vault.
And finally, just days ago, Origin Dollar, a meta-stablecoin (a number of stablecoins making up a single stablecoin), was hacked for $7.5 million. Origin Dollar is run by a team of Silicon Valley engineers that were early employees at firms like Youtube, Google, PayPal, and more. In fact, one of Origin’s co-founders is a PayPal co-founder.
This attack was similar to the one that affected Akropolis: a malicious user tricked the Origin contract into thinking that they deposited funds they did not have, allowing them to withdraw a large amount of capital from the protocol.
The large concentration of attacks/exploits in one week has made many question how ready DeFi is for mainstream adoption.
Ethereum Foundation devs give an update on ETH2 & Ethereum economics via Reddit AMA
The launch of Ethereum 2.0—a.k.a. Serenity or ETH2—is supposed to be right around the corner. Researchers at the Ethereum Foundation, including Ethereum founder Vitalik Buterin, recently conducted a Reddit “ask me anything” to give users a status update on the upgrade.
Speaking on concerns that there won’t be enough ETH in the deposit contract to kickstart the ETH2 launch, researcher Danny Ryan responded by stating that the launch parameters can be adjusted:
“I personally think that for initial launch, the 100k+ ETH in the contract is sufficient, and that adjusting the threshold down to not leave that ETH in limbo for too long makes sense. Rewards will be very high for these early adopters and the ETH validating will likely grow over time… On that linked to thread, clients engineering teams seem to want to wait through December, and adjust the constant at the start of January if need be. This seems reasonable.”
Discussing the concerns around ether’s inflation rate, Vitalik Buterin said that investors in the coin should be investing with the future in mind, as opposed to the present state of affairs on Ethereum.
“In two years the main task will be to stabilize and cherish what we will have built. Until then, participation in Ethereum is unavoidably in part a prediction that the roadmap is a good one and that once this upgrading process ends we actually will get to a place where the network is efficient and stable and powerful and capable of being the base of significant parts of the global economy.”