DeFi growth continued as Galaxy Digital invested in Parafi while bugs meant that Ethereum 2.0 testnet failed and YFI saw a price drop
In spite of limited volatility, capital continued to enter the DeFi space, with the total value locked in contracts increasing as a notable investor made a big entrance. Unfortunately, there were a number of setbacks this week as well, including the failure of an ETH2, or Serenity, testnet and a bug pertaining to Yearn.finance.
Here’s what you need to know this week about DeFi and the Ethereum network:
- Top DeFi tokens were range bound over the past week as bitcoin and ethereum also consolidated in a tight range, seemingly following the path of legacy markets.
- Galaxy Digital, the crypto-asset investment bank run by Wall Street veteran Mike Novogratz, made its first investment in DeFi this week through Parafi Capital.
- Parafi Capital is a crypto fund focused exclusively on decentralized finance investments.
- Yearn.finance (YFI) dropped this week due to a bug in a contract deployed by its founder.
- There was another bug pertaining to one of Yearn.finance’s Vaults.
- An ETH2, or Serenity, testnet failed to launch properly this week despite the imminence of “phase zero” of the upgrade
- An Ethereum development firm announced a new technological advancement this week called STARK that should help to scale the often-congested blockchain.
Galaxy Digital invests in Parafi Capital; DeFi investments make up 5% of its portfolio
While DeFi has seen parabolic growth this year, not all notable investors have a stake in this segment of the crypto market. Until recently, one such investor was Galaxy Digital, a crypto-asset investment bank run by former Goldman Sachs partner Mike Novogratz.
In the company’s Q2 2020 earnings call, Mitch Steves of RBC Capital asked the company if it has interests in DeFi:
“So as you guys know, there’s a very popular way of earning money in crypto, the crypto space — and both farming and decentralized finance, right. So if I think about where you are positioned now, is there any, I guess, any plans, are you able to participate in that market to help generate additional returns?”
Company president Chris Ferraro said that while there is an internal team researching DeFi at the “protocol level,” they didn’t have much capital deployed in the space. On yield farming in particular, which has been a focus of many retail investors, the president added that there is some uncertainty about regulation and scaling.
Things have changed over just a few weeks, though. Parafi Capital revealed on September 29th it “has received a strategic investment from an affiliate of Galaxy Digital Holdings Ltd.” Galaxy Digital joins Bain Capital Ventures, KKR co-founder Henry Kravis, and others as backers.
According to Frank Chaparro of The Block, Galaxy Digital’s investment in Parafi Capital and other investments in DeFi represent 5% of the fund’s capital.
Speaking on DeFi as a whole, Novogratz told Chaparro:
“That’s because [DeFi] is more radical than anything. It is truly peer to peer trading, peer to peer insurance, lending, bringing the blockchain to the financial system. That’s scarier than digital gold.”
Total value locked in DeFi hits $11b as Uniswap, Maker gain traction
The total value of cryptocurrencies locked in reputable DeFi contracts hit $11 billion this week as per DeFi Pulse. The metric started September at $9.5 billion. This growth was led by Ethereum-based decentralized finance applications Uniswap, Maker, and Aave.
Uniswap’s liquidity mining incentives for UNI continued to gain traction despite a downtrend forming in the price of the cryptocurrency. Those that provide liquidity to Uniswap are now earning around 30–40% per annum on their deposits, though there is considerable impermanent loss risk.
Demand for the DAI stablecoin has continued to surge higher, resulting in an influx worth of USD Coin into MakerDAO vaults. There are some concerns that with the introduction of large USD Coin deposits into MakerDAO, the DAI stablecoin is becoming increasingly dependent on a central authority.
Eminence Finance game causes DeFi stir
Late last week, the founder of Yearn.finance, Andre Cronje, deployed a series of new contracts pertaining to a project called Eminence Finance. Few knew what it was, but due to the clout Cronje wields, many were quick to deposit DAI into a purchasing contract for the Eminence (EMN) token.
The contract gained around $15 million worth of deposits in DAI over the course of approximately 12 hours despite no official website or announcement pertaining to Eminence from Cronje or the Yearn.finance team.
This was for good reason: an anonymous user used an advanced transaction, where he leveraged “flash loans” from Uniswap, to systematically drain the $15 million worth of DAI in the contract despite putting up zero collateral.
Despite the hacker returning $8 million of the stolen $15 million for an unexplained reason, this bug resulted in a strong correction in the price of Yearn.finance’s YFI token, along with a wider sense of concern forming in the DeFi space.
Once he woke up, Cronje revealed that he had deployed staging contracts for an upcoming Ethereum-focused video game called Eminence, though he asserted that the project was not to be officially launched for three weeks.
Yearn.finance vault bug concerns users
At the same time as the Eminence bug, other members of the Yearn.finance team identified a bug in one of the protocol’s yVaults (Vaults). Vaults are automated strategies where users can deposit cryptocurrency to earn a yield. The bug was a small one but it meant that users of the YFI Vault were paying a 5% withdrawal fee as opposed to the marketed 0.5% fee.
The number of bugs pertaining to Yearn.finance has concerned some users, which has translated into weak price action for YFI.
ETH2 Spadina testnet failed to gain enough traction
After years of development, the first phase of the Ethereum 2.0 upgrade (also known as ETH2 or Serenity) is finally nearing. As we explained in a previous blog, a number of prominent Ethereum developers and researchers have confirmed that the upgrade is well on its way.
This culminated last week with the launch of what was expected to be the final testnet before the launch: Spadina. Spadina was marketed as “dress rehearsal” for the full ETH2 launch, which would bring Ethereum into its next era as a smart contract blockchain.
Unfortunately, despite the high expectations, things did not go to plan.
Ethereum Foundation’s Danny Ryan explained that while the testnet was “justified” and “finalized,” there was low participation amongst nodes that resulted in a “bad look” for Spadina:
“Although the eth2 clients have generally become quite robust, the long wait for finality today highlighted issues closer to the edge of the stack — cli options, testnet config, bootnodes, genesis calculation bugs… Even though we expect moderately low participation on a short-lived non-incentivized testnet, small errors in the client release process great exacerbated this problem.”
To hopefully rectify these bugs, Ryan announced one more dress rehearsal, Zinken, which will be launched in the coming weeks prior to the official Genesis of ETH2.
Community celebrates as Ethereum scaling solutions continue development
This week, StarkWare, the development company focused on so-called STARK technology, revealed it made the first step in building a compiler that will facilitate Solidity code to be translated into Cairo code. Cairo is StarkWare’s layer-two scaling solution currently in the works.
This accomplishment means that it will be easier for Ethereum developers to port smart contracts currently based on the main blockchain onto layer two solutions using StarkWare technology.
Among those that celebrated this news include Balaji Srinivasan, CMS Holdings, Paradigm’s Matt Huang, and Multicoin Capital’s Kyle Samani. Srinivasan, the former CTO of Coinbase and a long-time Silicon Valley name, said that this may result in a “radical reduction in Ethereum gas costs.”