DeFi update — this week, DeFi protocol assets took a hit, while an Ethereum scaling solution saw a notable investment from a16z.
The crypto market began to correct over the past week after a rapid run-up over the past few months. As we reported in this week’s edition of Bitcoin Moves, the price of Bitcoin slid under $50,000 this past week, forcing a strong move lower in the price of Ether and the rest of the altcoin market.
At one point this past week, as per OKCoin market data, ETH traded as low as $1,353. Altcoins, especially decentralized finance-related coins, underperformed BTC as investors exited their positions for the relative safety of Bitcoin or, in some cases, cash.
Despite the crypto market-wide correction, the DeFi space continued to see positive fundamental events this past week. Scaling took a large step forward, with certain Layer 2 scaling solutions on Ethereum gaining traction.
Furthermore, according to The Block, DeFi protocols have already seen record monthly revenues, with over $170 million generated as per data the firm collected. Decentralized exchange Uniswap generated 43.6% of that revenue alone.
- Ether dropped under $1,400 amid this past week’s overall crypto market correction
- Alongside ETH, DeFi tokens took a hit, as most are Ethereum-based
- This past week, it was revealed that prominent venture capital firm a16z is supporting a forthcoming Ethereum scaling solution.
DeFi underperformed BTC, while TLV took a plunge
Prominent decentralized finance tokens underperformed Bitcoin over this past week. Ethereum-based governance tokens for DeFi protocols, such as COMP, have fallen by over 20%, while the BTC price lost 14% on the week.
The total value locked in all DeFi protocols (in USD terms) saw a sharp decline this week, dropping almost 20%. TVL in DeFi currently stands at about $37.26 billion, according to data from DeFi Pulse.
Crypto liquidations erupt amid a market downturn
The overall crypto market correction this week triggered a spike in liquidation volume in DeFi lending protocols. According to DeBank, more than $117 million worth of on-chain loans taken through DeFi platforms like Compound and Maker, were liquidated on Feb 22. This marks the largest day of DeFi liquidations for the cryptocurrency market ever.
While DeFi is a concept predicated on over-collateralization, users are liquidated when the value of the collateral they have posted falls under a certain ratio, which triggers a smart contract or liquidators to forcefully liquidate one’s loan.
Users in DeFi often deposit ETH or WBTC (Bitcoin on the Ethereum blockchain) into platforms like Compound and borrow stablecoins which can be deposited to generate a yield in a process called yield farming. While this strategy may seem safe when the market is trending higher, investors are exposed to their collateral being liquidated when the market turns down rapidly.
If you’re interested in earning yield via DeFi protocols, but want a user-friendly platform and no Ethereum gas fees, try out OKCoin Earn.
Ethereum core devs propose a new type of fee
A key discussion that took place over this past week was around Ethereum Improvement Proposal 1559, or EIP-1559. The proposal was first created almost two years ago centers around the now infamous topic of Ethereum network fees, or gas.
To keep it short and simple, EIP-1559 is a proposal, co-authored in part by Ethereum co-founder Vitalik Buterin, that would implement a base fee for every Ethereum transaction on the current chain (Ethereum is upgrading soon to Ethereum 2.0, with an entirely different system). According to the proposal, the base fee would be burned, while miners would receive a separate “inclusion fee.”
According to an analysis by Paradigm’s Georgios Konstantopoulos and independent cryptocurrency researcher Hasu, approximately 20-35% of miner revenue may be burned once this proposal is implemented.
While this proposal has seen much support within the Ethereum community — as some speculate that it may boost the ETH price while also making Ethereum cheaper to use — it has seen some pushback from certain members of the community.
As we covered in a previous DeFi Update, Flexpool, a smaller Ethereum mining pool, wrote that it is not a fan of the EIP-1559 integration:
“At Flexpool, we feel it is not right to support an initiative that proposes to pay our miners significantly less for the same work. No money is being saved on transactions; instead, it’s being paid then destroyed. Our miners don’t support EIP-1559 and thus are against it too.”
Despite this initial pushback, the support for EIP-1559 has picked up steam recently after a number of public and private discussions on the subject of rising Ethereum gas fees and network congestion.
F2Pool, one of the largest Ethereum mining pools, recently confirmed its support for the change:
“After The DAO hard fork, key developers and core contributors have consistently built on the current Ethereum, helping it thrive and grow to its state today […] Today, the general community along with core developers are siding with evolving Ethereum to include EIP-1559. It is important to side with the users and core contributors.”
This recent traction has culminated in an effort to include EIP-1559 in an upcoming upgrade.
Tim Beiko, a product developer at ConsenSys who has been leading recent discussions around EIP-1559, proposed earlier today that EIP-1559 should be integrated in into the so-called “London upgrade”:
“After 1.5 years of active development, I believe EIP-1559 is finally ready to be included in a network upgrade and would like to propose it be included in the upcoming London upgrade. While there are still things to iron out in the client implementation, I believe that there are no ‘major issues’ outstanding on the EIP and that it is ready to go through the normal network upgrade testing process.”
VC firm a16z supports Optimistic Ethereum
This week, prominent crypto-focused venture capital firm a16z, also known as Andreessen Horowitz, revealed that it had invested in Ethereum scaling project Optimism. Optimism is the development team behind Optimistic Ethereum, a Layer 2 scaling solution on Ethereum that uses a technology called optimistic rollups to, as a16z stated, “achieve far lower fees, far lower latency, and far greater throughput versus Ethereum Layer 1.”
A16z led the firm’s $25 million Series A round, which closed last year. The investment firm stated that it is excited about Optimism, both in terms of the team’s philosophy and its technology:
“One of the most exciting things about what Optimism has built is that it can be seen in many ways as an extension of Ethereum — from its philosophy down to its tech stack. This close adherence to Ethereum development paradigms results in a very easy transition for developers, wallets and users: no new programming languages, minimal code changes to existing contracts required, and out-of-the-box support for the majority of existing Ethereum tooling.”
Grayscale considering adding DeFi assets
Early this morning, digital assets manager Grayscale Investments announced that it is considering supporting a number of cryptocurrencies, adding to its support of Bitcoin, Ether, and other top digital assets:
The firm shared a list of crypto assets under consideration, including a number of names in the DeFi space, such as AAVE, COMP, Maker’s MKR, Yearn’s YFI, Uniswap’s UNI, and SushiSwap’s SUSHI.
If the firm does decide to support these assets, it will create Trusts for them to allow institutional investors to acquire exposure to these assets through shares that represent the underlying assets.
The move from Grayscale marks continued institutional interest in the decentralized finance space.
Buy ETH and DeFi tokens on OKCoin, your licensed and globally-regulated crypto exchange. Read previous DeFi updates here.