This week’s DeFi Update focuses on Ethereum Improvement Proposal 1559 controversy, Uniswap’s v3 upgrade and expanding institutional interest in the decentralized finance market.
Decentralized finance saw an overall boost this past week. The total value locked in DeFi protocols in USD grew almost 15% to over $45 billion. The performance of top DeFi protocol assets was somewhat mixed, however.
The Ethereum and DeFi space saw a number of positive fundamental developments over the past seven days, bolstering the long-term potential of this space.
- The discussion around the EIP-1559 upgrade continued to stir this past week, evidently leading to a split between Ethereum users/developers and miners.
- A bug in decentralized exchange Dodo was exploited, resulting in the loss of $3.8 million in crypto.
- Institutional capital entered the DeFi markets over the past weeks via Bitwise, an institutional crypto asset manager that recently launched a DeFi fund.
Dodo undergoes exploit
While DeFi saw a number of positive events over this past week, this space was still rife with a few setbacks stemming from the nascent nature of the space.
A decentralized exchange known as Dodo suffered an exploit, as there were certain bugs that allowed attackers to execute flash loan arbitrage transactions to drain money from the exchange. In total, more than $3.8 million worth of cryptocurrencies were drained from Dodo.
After some discussions with the attackers and with cybersecurity experts in the space, more than $3.1 million worth of the stolen funds were returned.
While the funds were returned, this story — like the other exploits of DeFi protocols this year — once again illustrates how early DeFi is in its development and why traders should exercise caution when using these emerging platforms.
Ethereum Improvement Proposal 1559 controversy continues
As we’ve covered in previous DeFi Updates, discussions continue to heat up around Ethereum Improvement Proposal 1559. EIP-1559 is a proposal to update Ethereum’s code to change the fee system for the current proof-of-work network (Ethereum is in the process of upgrading to a proof-of-stake system with Ethereum 2.0). It was created as a response to congestion on the Ethereum network, which — because of its competitive, demand-based fee, or gas, system — has resulted in rising transaction fees.
As of March 5, Ethereum’s core developer community came to a conclusion that EIP-1559 will go live in an upcoming network upgrade, dubbed “London,” and scheduled for July.
While many in the industry, especially those who use Ethereum-based assets or protocols, stand to benefit from the proposal and more predictable fees, Ethereum miners have expressed concern about what promises to be lower revenue.
At the end of this week, on March 12, another proposal was introduced, EIP-3368, that could evidently be implemented alongside EIP-1559. It proposes a block reward increase for Ethereum miners that decays according to a set schedule over two years. Ethereum developers have been responding to and debating the new proposal over the weekend on the Ethereum Magicians Forum.
As the London upgrade approaches, there is likely to be serious shows of forces between all sides of the Ethereum community before some consensus is struck on the new proposals.
Su Zhu, the CIO and co-founder of Three Arrows Capital, told the community in an interview that the EIP-1559 controversy may introduce serious volatility into the crypto asset markets.
Uniswap v3 hype ramps up
While some popular DeFi coins have been flat over the past few days, UNI has seen a strong rally over the past 10 days. Uniswap’s native coin traded at $24 at the start of March, though now trades near $28, according to OKCoin market data.
In 2020, Uniswap released the v2 iteration of its decentralized exchange protocol, which quickly became widely adopted and the standard for other decentralized exchanges based on Ethereum, and even on other chains like Avalanche.
While Uniswap maintained dominance through 2020, early 2021 has seen growth in other Ethereum-based DEXs, such as SushiSwap and Curve Finance, which have begun to eat away at Uniswap’s market share.
Recently, yet another much-awaited upgrade to the protocol, Uniswap v3, has begun to garner hype as the protocol’s creator drops hints about its impending launch. While a concrete date has not been set for the upgrade, Uniswap v3 is expected to serve users with a much cleaner experience by counteracting high transaction fees and by improving the capital efficiency of the protocol.
DeFi sees institutional demand via Bitwise
The decentralized finance space is seeing a strong spike in institutional demand.
According to a filing with the Securities and Exchange Commission published in early March, Bitwise’s DeFi-focused index fund has brought in more than $32.5 million worth of inflows from 262 accredited investors.
The Bitwise DeFi Crypto Index Fund, which the firm announced last month, is a fund that allows institutional players to obtain exposure to the decentralized finance market.
According to the firm’s website, the fund holds AAVE, SNX, UNI, MKR, YFI, COMP, UMA, LRC and ZRX, crypto assets representing exposure to some of the top Ethereum-based DeFi protocols at the moment.
Retail investors currently cannot access the fund, though some of the assets contained in it are also available to trade today on OKCoin.
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Read previous DeFi updates here.355