In the November 6th DeFi update, we look at recent market volatility, why a Wall Street firm owns $75M in Ethereum tokens, and timing for Ethereum 2.0
Both bitcoin and ethereum have continued to rocket higher since our Bitcoin Moves report published on Tuesday. As this is being written, BTC just cracked $15,500 for the first time in almost three years. ETH is rallying as well, though not as much as the flagship cryptocurrency.
As the price of bitcoin boomed this week, it was initially a tough week for the decentralized finance (DeFi) market. DeFi tokens fell by 10–30% across the board, before bouncing back strongly in the last 24 hours regaining most of the loss in the last week.
As of yesterday, the worst DeFi performer this week had been Yearn.finance’s YFI, which dropped by around 30% as per OKCoin market data. YFI traded at $7,500 at its local lows, though now trades at about $10,692 — an approximate 37% gain. Uniswap (UNI), Compound (COMP), and others also incurred large losses, but have rebounded by about 27% and 12% respectively.
- DeFi tokens continued to correct this week despite bitcoin and ethereum surging higher.
- It appears that the drop in DeFi is once again a result of the speed of bitcoin’s uptrend, which is taking attention and capital away from altcoins.
- Investors remain bullish on long-term prospects of the space, as evidenced by on-chain trends showing institutions accumulating DeFi tokens.
- The deposit contract for ETH2, also known as Serenity, was released this week despite previous concerns that it would not be ready in time.
State of DeFi
Some analysts pointed out on Twitter that there have been signs of distribution by early DeFi adopters, who accumulated their holdings at prices far below current prices.
It also appears that there has been a rapid rotation of capital from DeFi tokens and tokens from other sectors into bitcoin and ethereum, which are coming under the retail and institutional trader spotlight. Bitcoin, in particular, is seeing a rapid uptrend due to it being seen as a hedge against the inflation of the US dollar.
DeFi tokens are starting to show signs of bottoming, though. As some cycle out of altcoins, there are institutional investors and “whale” addresses that are cycling into altcoins, especially Ethereum-based coins.
The Ethereum ecosystem — from ETH itself to the DeFi space — got a notable fundamental boost this week when ETH2 developers released the deposit contract. This came after a researcher at the Ethereum Foundation said in an interview that he was worried that a delay of one to two months was going to take place.
Is there another DeFi correction coming?
This week we saw the average DeFi token fall by approximately 75% from the all-time high, and as of yesterday, analysts were not convinced that the sell-off has ended. The issue is that as bitcoin appreciates quickly, the air becomes sucked out of altcoins, especially in DeFi. Over the past 24–48 hours, we’ve seen DeFi recoup some of those losses.
Ari Paul, CIO and CEO of BlockTower Capital, commented that while he does see some long-term buying opportunities here, the risk of another 50–60% drop from here should be considered by investors:
“Defi down 85% yet? That’s a point to *start* looking for value, but remember that the fall from 85% to 95% down is another 65% loss.”
His concern is that because DeFi tokens rallied in a parabolic fashion in the first half of this year, a correction of 80–90% is to be expected. Bitcoin, for one, has corrected over 80% after the past three macro rallies. Altcoins have done the same.
Qiao Wang, a former head of product at Messari, echoed Paul’s thoughts. He commented:
“Assuming BTC doesn’t moon anytime soon, a -50% nuke is more likely than a +50% from here for DeFi IMO. After that we can begin a 2017-style bull market for the quality DeFi assets.”
Wang previously commented that he thought DeFi would be safe from the parabolic nature of the cryptocurrency market due to fundamentals.
Institutional investors are scooping up DeFi tokens on Ethereum
After the correction, DeFi asset price action is ranging significantly lower relative to summer highs.
This is a result of continued growth in DeFi deposits despite the drop in the tokens that underpin this space. Data from DeFi Pulse indicates that there remains over $10 billion worth of Ethereum, stablecoins, and other cryptocurrencies locked in top applications. More information about the relatively cheap valuations of DeFi tokens can be found in this edition of DeFi This Week.
Citing data from the blockchain analysis firm Nansen, Messari analyst Mason Nystrom noted that Wall Street trading firm Jump Trading holds at least $75 million worth of Ethereum-based tokens and ETH. Nansen uses proprietary heuristics and publicly-known information to link the identities of investors and firms in the space to addresses on Ethereum.
The data indicates that Jump Trading holds COMP, Keep Network’s KEEP, HXRO, Numeraire’s NMR, Orchid Protocol’s OXT, and MakerDAO’s MKR. The exact distribution of Jump Trading’s holdings was not disclosed, but Nystrom noted that the firm has purchased 47,000 COMP in the past week alone. 47,000 COMP is currently worth approximately $4,000,000.
Nystrom added that Jump Trading owns at least $32 million worth Serum (SRM), the token of the Serum exchange on Solana. OKCoin is considering listing both SRM and Solana’s native token, SOL.
This comes shortly after Polychain Capital, a leading crypto-asset venture fund, bought $3 million worth of YFI. This was Polychain’s first investment in the cryptocurrency, data from Nansen indicated.
Another blockchain data firm, Santiment, also found evidence of institutions, or at least whales, accumulating Ethereum tokens. It wrote two weeks ago:
“With most eyes on #Bitcoin’s market price between this $12.7k and $13.3k range, whales of many respective $ETH-based #altcoins have added to their non-exchange bags. $ETH, $LINK, $REN, $ELF, $KNC, & $ZRX are among those recently hitting one-year highs.”
Ethereum 2.0 deposit contract finally rolled out
The ETH2 upgrade, also known as Serenity, has long been notorious for its vague and always-changing timeline. At the start of 2020, the upgrade was slated to launch in June or July, though it was delayed multiple times to Q4 of 2020. Prior to that, there were some expectations it would launch in 2019.
Finally, though, ETH2 is on track to launch very shortly.
After there were concerns that a security audit would delay the launch, this week Vitalik Buterin, founder of Ethereum, confirmed the release of the ETH2 Deposit Contract. A day prior to the release, the contract and other important files pertaining to Serenity were seemingly leaked on Github.
As ETH2 is technically a new blockchain, users that want to participate in this launch must deposit Ethereum from “ETH1” into this contract, which will yield a “new token” on this new chain.
To quickly refresh you, ETH2 is expected to launch in a number of phases, which will activate different parts of this new chain. The phase expected to launch this year will only include Proof of Stake (PoS), a consensus mechanism that removes the need for miners. PoS will give those that participate the opportunity to earn a return on their ethereum, as long as they properly validate blocks.
As for how this helps DeFi in particular, analysts say that due to the yield natively offered in ETH2, yields on Ethereum applications on ETH1 will naturally increase.
The technological improvements contained in ETH2, such as the introduction of sharding, is also expected to bolster DeFi by improving the user experience.
DeFi presidential prediction markets
One of the biggest stories in DeFi this week pertained to the US presidential election. Prior to this election, those that bet on the election had to use centralized platforms that are geographically restricted and have custodial risks. Centralized betting platforms also disallow users to obtain leverage on these markets, or to sell their bets on candidates on the fly.
DeFi platforms quickly gained traction over the course of the election due to the decentralized and composable nature of Ethereum applications. Augur, Polymarket, and other Ethereum-based betting applications gained traction, both in terms of the value locked in these contracts and in terms of their presence online. Polymarket’s presidential election market has nearly $10 million worth of trade volume. Augur reported $4.7 million worth of open interest in its market, along with $8.6 million in volume. Trades are still coming in as uncertainty is still abundant.
Many in the cryptocurrency space commented on how fascinating it was to them that there were non-crypto users using Polymarket and other Ethereum applications as a point of reference for betting odds.
Some did note, though, that the use of Ethereum applications for election betting also accentuated how far this space has to go before going mainstream. Namely, it would be almost impossible for someone who knows little about cryptocurrency to begin using these platforms at a moment’s notice.
Australia’s central bank wants to use Ethereum tech
In a further win for Ethereum bulls, Australia’s central bank revealed this week that it intends on using an Ethereum-based network and Ethereum technologies to test its central bank digital currency. The Reserve Bank of Australia wrote in an announcement:
“The Reserve Bank today announced that it is partnering with Commonwealth Bank, National Australia Bank, Perpetual and ConsenSys Software, a blockchain technology company, on a collaborative project to explore [CDBCs]… The project will involve the development of a proof-of-concept (POC) [built…] on an Ethereum-based DLT platform.”
The uptick in the adoption of Ethereum as a platform lends credence to the sentiment that it soon will be a network for mainstream companies to develop financial applications on.