Ethereum underwent a rally as ETH2 took place while DeFi protocols have been bugging out and making acquisitions
Like bitcoin, the past week was full of surprises and volatility for ethereum and the broader decentralized finance (DeFi) market.
TL;DR
- Ethereum and top DeFi tokens underwent a strong rally this past week after last week’s Thanksgiving crash.
- ETH is up 22% in the past seven days while some DeFi tokens increased more than 32%.
- Ethereum and DeFi saw strong fundamental developments this past week, including the launch of Aave V2.
- Paul Tudor Jones gave Ethereum his nod of approval today in an interview with Yahoo Finance.
- Stablecoins are under fire in a new bill put forward by Congress.
- In the past week, Yearn.finance merged with/acquired Akropolis, Cover Protocol, Cream Finance, and SushiSwap.
DeFi market update
ETH itself underwent a strong correction alongside bitcoin, falling as low as $480 as per OKCoin data. The cryptocurrency has since undergone a massive rally after the Ethereum 2.0 upgrade was confirmed.
On the date of the Ethereum 2.0 launch on December 1st, ethereum moved as high as $636—the highest the top token has traded since the middle of 2018. That meant that from last week’s lows, ETH gained 32%.
DeFi also benefited from this rally. Top decentralized finance coins such as Yearn.finance’s YFI and Aave’s AAVE are both up by approximately 40% in the past seven days. Further, SushiSwap’s SUSHI token is up 75% in the past week. These coins have both benefited from positive fundamental events, such as the launch of Aave v2 and Yearn.finance joining forces with SUSHI.
Analysts are optimistic about the future of DeFi amid the launch of ETH2 and as investors such as Paul Tudor Jones give Ethereum their nod of approval.
Ethereum 2.0 launch takes place
Early Tuesday morning, Ethereum 2.0—the multi-faceted Ethereum upgrade also known as Serenity or ETH2—went live after months of anticipation.
Data aggregated by Spencer Noon, a venture investor and on-chain analyst, found that the upgrade saw 900,000 ETH deposited by 2,700 unique addresses. This means that more than $500 million worth of ethereum was locked into this new iteration of the blockchain.
Crypto research firm Messari released an extensive report outlining the implications of the upgrade to celebrate the launch. It highlighted that there is unlikely to be competition between those that want to stake ETH on Ethereum 2.0 and those that want to use ETH as collateral or a yielding asset within the DeFi space.
“Beyond the systemic risk of the Ethereum blockchain failing, which every asset on Ethereum assumes, staked ETH just assumes the risks of validator performance. On the other hand, ETH deposited in DeFi assumes smart contract risk, liquidity risk, solvency risk, and composability risk from interconnectedness of DeFi protocols. In short the use cases serve two different purposes and competition between them may not be as simple as who offers the higher yields.”
DeFi yields eclipsing the yields of ETH2 staking has been a large concern shared by some in the space. Ensuring these two markets aren’t highly competitive has been seen as important by some market participants.
Paul Tudor Jones recognizes Ethereum in an interview
Legendary Wall Street investor Paul Tudor Jones mentioned Ethereum in a recent Yahoo Finance interview. He did admit that he isn’t “smart enough” to figure out what a world of multiple cryptocurrencies will look like, though speculated that there may be a precious cryptocurrency like bitcoin and an industrial one such as ethereum.
In that same interview, the investor, who is up 100% since he invested in bitcoin in April or May, added that Bitcoin’s market capitalization is “wrong,” as in too low.
Yearn.Finance acquisitions
In last week’s DeFi blog, we mentioned that Pickle Finance had basically merged forces with Yearn.finance in what seemed to be the first “acquisition” of a decentralized protocol by another.
The goal there was to realize synergies between the protocols. Both Yearn and Pickle are yield aggregators that allow users to deposit stablecoins or popular cryptocurrencies to earn a regular yield.
The acquisitions continued to stream in this past week, with there seemingly being a focus on protocols that got hacked or were exploited in some way.
In the past week, Yearn.finance merged with/acquired Akropolis, Cover Protocol, Cream Finance, and SushiSwap.
- Akropolis is a multi-faceted DeFi protocol focused on serving institutional clients. It was hacked for $2 million recently due to a re-reentrancy bug that basically allowed a user to pretend they made a deposit, even though they didn’t.
- Cover Protocol is a decentralized insurance protocol allowing users to obtain insurance on deposits into top DeFi protocols. Cover’s initial launch was controversial due to a purported bad actor attempting to pump and dump the coin; those rumors have yet to be substantiated.
- Cream Finance is a decentralized money market protocol that was forked from Compound. Cream has taken a focus on governance tokens such as YFI, which protocols such as Compound have yet to integrate.
- SushiSwap is a decentralized exchange that is looking to break into the money market space. The market seems to be most excited about the Yearn.finance and SushiSwap merger, with the protocol’s respective tokens rallying by 35% and 75% this past week, respectively.
According to the blog post announcing the Sushi merger, the two groups of developers will be working on Yearn-related projects such as Deriswap. As we covered last week, Deriswap will combine decentralized exchange, derivatives known as options, and decentralized loans into a single protocol.
These five acquisitions will allow the protocols’ developers to join forces to collectively build DeFi use cases that previously would have been difficult without collaboration.
Bugs upon bugs
But not all was well and good in Ethereum and DeFi this past week: on Sunday morning, the Ethereum DeFi space faced three notable bugs. Each of the three bugs has since been solved by their respective developers. Though, there were fears that a large sum of funds was lost for a period of time.
The first bug happened with SushiSwap. Users on Twitter and in Discord noticed suspicious transactions involving SushiSwap’s “SushiBar” pools, which allows liquidity providers to earn SUSHI. It appeared as though the account issuing these transactions was making a large amount of capital every time he completed a cycle of deposits and withdrawals.
SushiSwap developers quickly patched the issue, with only $10,000 being stolen from the protocol.
The second bug pertained to Saffron Finance, a DeFi derivatives project launched by anonymous developers. Users had become hyped about the protocol as many prominent names in DeFi had accentuated its importance.
More than $50 million became locked in the protocol on Sunday morning, though, after a user deployed a “malicious array” to freeze the contracts. Some thought the funds were locked forever, but the developers devised a solution that has since unlocked the funds.
And finally, Rari Capital, a yield aggregator, underwent a withdrawal bug at the same time Saffron began to bug out. Some thought the two issues were connected, though it was just an overflow error with one of the parameters within the Rari protocol. This issue, too, was quickly fixed.
A DeFi founder “rug pulls” $12 million
This past week also saw a $12 million “rug pull” or scam, where the developers of a newly-launched DeFi protocol ran off with that sum of capital after deploying malicious code that went undetected.
The scam pertained to a newly launched protocol called Compounder Finance, whose goal was to allow users to earn a yield on their deposits, similar to Yearn or Pickle.
The owner of the protocol deployed malicious code that allowed him to manipulate the protocol to withdraw funds into their own wallet.
Stablecoins under fire
Regulatory pressure is heating up against stablecoins. Stablecoins have gained much traction over the past year as they allow companies to easily send dollars around the world and also as a result of DeFi’s growth.
Three U.S. representatives released the STABLEAct. The office of Congresswoman Rashida Tlaib of Detroit, who is leading this new bill, wrote in a press release announcing this potential legislation:
“The COVID-19 Pandemic has exposed numerous barriers to accessing and utilizing mainstream financial institutions, leaving many to look to the financial technology sector to meet the financial servicing needs of low- and moderate-income (LMI) consumers for everything from faster direct payments, access to loans, and even access to bank accounts. LMI consumer vulnerabilities could be exploited and obscured by bad actors looking to issue stablecoins, like other shadow money issuers in the past. “
Many in the cryptocurrency space see this bill as a misguided attempt to regulate the space. There is concern that this kind of regulation could harm DeFi by taking away stablecoins, one of its core collateral asset classes.
Investor and crypto entrepreneur Reuben Bramanathan wrote in a widely-shared Twitter post that stablecoins actually increase access to financial services, not decrease access as the bill suggests:
“The #STABLEAct is a confused attempt at regulating perceived harms that are not actually caused by the technology, but are, ironically, inherent in the existing financial system that cryptocurrencies are designed to replace.”
Aave v2 launches
On Thursday morning, the Aave team rolled out Aave v2, a new iteration of the prominent money market protocol. Aave is the fourth-largest Ethereum-based protocol, with around $1.5 billion in assets locked.
The v2 upgrade introduces user experience improvements, such as the ability to easily swap between collateral types.
Per an Aave document obtained by CoinDesk, collateral swapping can help users avoid liquidations:
“Collateral swapping can be a useful tool to avoid liquidations. If the price of your collateral starts to fall, for example, you can simply trade it for a stablecoin so you don’t have to worry about price fluctuations and potential liquidation.”
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