With the Ethereum 2.0 update just weeks away, ETH is up 15% while markets are experiencing high volatility and some DeFi assets are dropping
TL;DR
- While Bitcoin and Ethereum surged 15% over the past week, most DeFi tokens have stalled.
- Tokens such as AAVE, SNX, RUNE, YFI, and COMP have dropped about 10% in the past week.
- Ethereum 2.0 moved closer this week as a developer working on the update revealed that the deposit client code is set to release.
- DeFi saw continued interest from Silicon Valley this week as Naval Ravikant, a legendary angel investor, discussed it in a podcast.
- A new decentralized finance project called Barnbridge launched with over $200 million worth of stablecoins in its yield farming pool — a record.
State of the market
Both Bitcoin and Ethereum have undergone strong rallies since last week’s lows. The digital assets are up approximately 15% in the past seven days, OKCoin market data shows. The rally was predicated on two news events: PayPal announcing support for cryptocurrency and the U.S. continuing to push for another fiscal stimulus bill.
Despite the strength in the price of Bitcoin, which set a new year-to-date high above $13,000 this past week, decentralized finance (DeFi) tokens have plunged lower.
CoinGecko data indicates that a slew of DeFi projects have shed 5–15% over the past seven days. This list includes Aave (AAVE), the Synthetix Network Token (SNX), Thorchain’s RUNE, Yearn.finance’s YFI, and Compound (COMP).
Prominent fund manager Su Zhu commented that the underperformance in altcoins can be pinned to the strength of Bitcoin’s move higher. Altcoins often underperform the market leader when volatility is high:
“$BTC going up swiftly is not only not bullish for alts but it’s bearish. Reasons for this are myriad but boil down to the fact that money is a coordination game and Bitcoin is the Schelling point; this is independent of how you feel about it, community is literally irrelevant.”
Despite this continued weakness in the price of DeFi investors, fundamental trends continue to demonstrate growth in this nascent segment of the cryptocurrency market.
The bullish fundamental trends behind DeFi right now
As outlined last week, the fundamental trends behind DeFi are stronger than ever despite compression in the prices of tokens pertaining to the space.
Head of DTC Capital Spencer Noon noted that while top coins such as YFI and AAVE are down by over 50% from their all-time highs, the “most important indicators” for the health of this space continue to push all-time highs. Namely, the total value locked in DeFi contracts is now at $12.4 billion while the number of ERC-20 stablecoins has breached $14 billion. He explained:
“Despite a month that saw most tokens fall 50% or more, #DeFi is *still* at ATHs with its most important indicators… Don’t listen to the degens who burned out. Phase 2 of this #DeFi bull market will make this summer look like nothing.”
Noon attributed the recent correction and lull in prices to overall exhaustion in the DeFi space. During the bull run from May to August, investors in the space were stuck to their screens, but naturally began to pull back as they exhausted their capital and mental resources:
“And yes, I believe burnout played a major factor in the recent DeFi drawdown. Farmers spent 3 months making serious gains but with barely any sleep. When the market naturally corrected, anecdotally many of my farmer friends decided to hit the sidelines out of sheer exhaustion.”
Jack Purdy, a researcher at Messari, echoed the sentiment that on-chain trends show DeFi is in anything but a bear market.
He shared data indicating that decentralized exchange volume, decentralized debt positions, protocol revenues, decentralized derivatives, and the total value of locked tokens all have grown dramatically over the past few weeks even in the face of dropping token prices.
Silicon Valley takes notice of DeFi
Speaking to the strong fundamentals of DeFi, an increasing number of Silicon Valley investors have taken notice of the space. Firms like Andresseen Horowitz and Sequoia have made investments in digital assets and blockchain firms, but have mostly stayed away from DeFi thus far.
Naval Ravikant, an angel investor known for investing in Uber, Twitter, Notion, and other companies, recently talked about DeFi on the Tim Ferriss Show. He said:
“And so a lot of people who are now participating in the crypto world, they’re building a decentralized Wall Street, they call it DeFi, D-E-F-I, for decentralized finance. But I actually think it’s more like DEFY as, just defy the government, DEFY.”
He accentuated how interesting it is that instead of intermediaries, DeFi runs on “math and algorithms and code.” Ravikant added that he thinks on balance, DeFi will be a “better Wall Street.”
Ravikant went on to specifically highlight stablecoins, which he says are going to be crucial for those that want to participate in DeFi but want to hedge the volatility of the cryptocurrency market.
Qiao Wang, a noted crypto-asset analyst and trader, commented that more broadly, he is seeing an increasing Silicon Valley influence in DeFi:
“It seems that Silicon Valley finally discovered DeFi. Relatively to crypto natives, they are characteristically late. They were late with BTC, ETH, and this time DeFi. But if history is any indication, they’ll hype it up and create a huge bubble out of it in the coming years.”
Within the crypto space, we’re seeing an uptick in DeFi investment with investors like Jason Williams of Morgan Creek, Mike Novogratz of Galaxy Digital, and others allocating more time to DeFi.
Ethereum 2.0 expected to launch within eight weeks
Ethereum 2.0 — also known as Serenity — is purportedly moving a lot closer as developers working on the update have confirmed crucial developments.
Ben Edgington, an Ethereum 2.0 developer at the research and development studio ConsenSys, recently shared to a blog that the deposit contract for the upgrade will soon be live. The deposit contract will facilitate transfers from the original Ethereum chain to this new chain where Proof of Stake is enabled. Edgington wrote that the introduction of this contract suggests that the Genesis of ETH2 will arrive within the next two months:
“Basically, as I understand it, we are good to go: deposit contract in the next few days; beacon chain genesis 6–8 weeks later. (This is not an official statement!). Meanwhile, be careful out there. Many fake deposit contracts and Launchpad front-ends will erupt in the coming days. Look out for the official announcements: do not send Eth to random contracts; this is not DeFi.”
Danny Ryan, an Ethereum researcher at the Ethereum Foundation, also recently confirmed in a podcast that progress on the upgrade has been moving along just fine.
It’s worth noting that a number of weeks ago, there was an ETH2 testnet that failed due to a number of bugs in the client. Another testnet has since been launched that has seen a more successful run. Edgington, though, asserts that the launch should come as soon as possible:
“Medalla, meanwhile, is suffering from very low participation. I think people are getting a bit bored of testnests. It’s time to move on. See this week’s Implementers’ call for some discussion about its future. I wrote a thing about why the testnets don’t really cut it any more, and we need to launch Phase 0 asap.”
Bloomberg publishes a report branding Polkadot an “Ethereum Blockchain Killer”
Even though Ethereum is not as congested as it was in August and September, the user experience on Ethereum-based DeFi applications is still far from perfect. Namely transaction fees can rack up and transaction times can act as a barrier to the development and adoption of certain types of applications.
Bloomberg released an article this week branding Polkadot (DOT), a new smart contract network focused on using sidechains called “Parachains” to increase usability, an “Ethereum blockchain killer.”
Although some see this as just marketing, Bloomberg cited data from Outlier Ventures indicating that Polkadot is seeing an uptick in development:
“While developer interest in Bitcoin and Ethereum has declined, the number of monthly active developers building on Polkadot increased by 44% in the 12 months ended in May, the report found.”
Gavin Wood, the Ethereum co-founder that now works on this project, is optimistic about what comes next for his brainchild:
“We are going to see a lot of different innovative products that can’t exist in a smart contract environment. Game blockchains, ensuring gamers don’t cheat. Blockchains within consortia. They are difficult to deploy in a smart contract environment.”
OKCoin has listed DOT, Polkadot’s native token.
BarnBridge launches, gains $200 million in deposits within a week
A much-hyped DeFi launch took place this week: that of BarnBridge, a tokenized risk protocol.
Much focus was put on the project because its stablecoin yield farming pool managed to accrue over $200 million worth of deposits within the first 24 hours of it being live. This makes it one of the biggest Ethereum-based yield farming schemes ever. Users that deposit stablecoins such as USDC and DAI can earn BarnBridge’s native token BOND.
Investors also put a focus on BarnBridge because its products, set to launch in Q1 2021, solve a key issue in DeFi. BarnBridge is seeking to financialize the DeFi space through derivatives that will allow more risk-averse institutional players to hedge their risks in the space, thereby increasing the total value locked in the space.
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