#32 DeFi stays strong
How DeFi is saving the day in the current crypto crisis, and bull signs from the NFT space, Polygon or MakerDAO.
Let me bring up my film school training to write a fiction-inspired recap of the last two months in crypto.
CRYPTO CREDIT CRISIS, SEASON 1
(SKIP INTRO and go to Episode 3 if you don’t need a refresher of the UST, Celsius, and 3AC crises)
Episode 1 - Terra’s doomsday
Do Kwon was sure that nothing could happen to the UST. His stablecoin was such a source of pride for him he even went for @stablekwon as his Twitter moniker. So when the UST started de-pegging from the dollar, he was still confident that the whole infrastructure he had created to defend it would prevail. Two months later, he wants you to know there’s a difference between being wrong and evil.
Find all the boring details about the collapse of UST, here: UST’S DOOMSDAY EVENT
Episode 2 - Celsius heats up, 3AC takes an arrow to the heart
Alex Mashinsky probably drank from the same fountain of confidence as Do. Here he is, beefing with Twitter users who said people had problems withdrawing from Celsius and then retweeting Celsius’ announcement that they would pause all withdrawals. Only 24h passed between the two messages.
Zhu Su was the charismatic leader of Three Arrows Capital (3AC), the feared and loved hedge fund led audaciously and unapologetically. On your left, when Zhu Su subtextually admitted the rumors of insolvency. On your right, the only tweet he has sent out since, one month later, drawing punches at the liquidators leading with the remains of the dying 3AC.
Here’s the recap we wrote during the first week of the event: CELSIUS’ FIGHT FOR SURVIVAL. As you’ll see in a minute, the Celsius drama is still unfolding.
Episode 3. Credit Crisis Contagion
To be fair, there is a global liquidity crisis: money flows out of crypto as fast as it’s flown out of any other risky investment (including well-established tech stocks). But the retreat of funds has revealed the weak foundations of reckless and overleveraged asset management habits of the bad apples who thought euphoria was the default state of mind in crypto.
Today we’re dealing with the consequences, and things look like this:
At least six crypto lenders had to halt operations at some point to contain the bleeding (Celsius, Vauld, Coinflex, Babel Finance, Voyager, and Coinloan); three are bankrupt (Three Arrows Capital, Voyager Digital, and Celsius); two have received bailouts from other companies in the industry (BlockFiand Voyager) that are likely to become acquisitions along the road. In addition, giants such as Genesis Trading and DeFiance Capital have admitted significant losses.
There are no solid reasons to believe that the bear market has met its floor. Some known threats could bring crypto prices down, adding more pressure to companies under stress and triggering further liquidations of leveraged positions.- namely, Mt. Gox (more on this later) and the situation of Bitcoin miners, who could eventually be forced to sell their BTC to pay their debts. Also, most companies currently in a predicament are centralized asset managers; we probably don’t have the complete picture of their situation.
The last minutes of Episode 3 showed Celsius fighting frantically for survival by repaying loans in decentralized protocols to unlock their collateral. They paid off loans in Maker, Compound, and Aave to unlock hundreds of millions in collateral they had provided. However, these funds were not enough to save them from filing for bankruptcy. We’ll see where the next episodes take us.
The moral of the story
The drama is still unfolding, but the moral of the story has already surfaced. DeFi has remained the soundest, sanest side of crypto during the crisis. Bankless wrote a piece called “CeFi Broke. DeFi didn’t”, and Pantera’s Dan Morehead took on a Wall Street Journal reporter who didn’t properly understand the differences to explain how “DeFi worked great.”
The bear run is draining funds from crypto badly, and it might continue to do so. But the infrastructure for the new generation of financial relations has already been built and is being/has been stress tested. A road with fewer cars is no less of a road, and DeFi will be ready to serve as the financial infrastructure for a new generation of crypto business models when the time comes.
⬡ Six Angles
We select six topics to illustrate the very different angles crypto can be approached from. We could choose dozens, but six is the atomic number of carbon… and otherwise we’d be writing for ages.
1. Scalability | Hyperactive Polygon
This has been Polygon in the last weeks.
Partners with smartphone company Nothing to improve Web 3-smartphone integration
Joins Disney Accelerator Program for hybrid AR/AI/NFT experiences
Polygon has also been picked as the weapon of choice by Meta in their experiments with NFTs on Facebook and Instagram. and by Twitter to integrate crypto tips on their platform.
So let’s take a minute to learn what Polygon is:
Polygon is a veteran in the scalability race. It was founded and launched as Matic in 2017-2018 as an EVM-compatible sidechain for Ethereum. You can think of the Ethereum Virtual Machine as Etehreum’s server software. EVM compatibility refers to the ability of all software (aka smart contracts) running on a blockchain, in this case, Polygon’s, to be fully compatible with Ethereum. So if you can deploy, let’s say, a DeFi protocol on Ethereum, you can easily “translate it” to Polygon and vice-versa.
Polygon is often classified as a Layer 2 compared to Optimism and Arbitrum. Although it does play that game, Polygon offers more than one solution to the different scalability challenges of Ethereum: some of those solutions are full-blown blockchains, and others are development tools… That’s probably why you’ll find it hard to see it neatly defined in one category.
2. Bitcoin | Mt.Gox awakens
Once there was an exchange to rule them all. MtGox was the mother of all bitcoin exchanges. At some point in its life, it handled 70% of all bitcoin transactions worldwide, even though it was a repurposed marketplace for playing cards (Magic The Gathering Online eXchange). That’s how professionalized the bitcoin user experience was back then.
In February 2014, MtGox collapsed: it all started by halting all withdrawals (some things never change), then all social media posts disappeared, and finally, the site went down. It was later revealed that the company had lost 850,000 of its customers’ bitcoin. That was ~$425M back then - today, it’s more than $18B (4% of the total supply of BTC).
Today, the long-lasting judicial drama of MtGox has moved on to the next phase: the early investors who lost their funds when the site went offline are about to be paid back.
When the news broke, crypto started to shake. 850k BTC could be returned to their owners, who might be inclined to sell to get their money back, adding severe selling pressure.
But there are a few reasons to keep calm: not all the 850K BTC have been retrieved. MtGox and the rehabilitators could only obtain ~137k BTC (17% of the total lost). Not all those who receive their money back will choose to sell - it’s easy to imagine that bitcoin holders from 2014 have enough faith in the space, after seeing it skyrocket all these years, to wait for better times than this bear market. And, in any case, they won’t receive the funds all at once or be able to sell them right away.
We dodged a bullet.
3. DeFi | Real-World Assets
The times of tokens exchanged for tokens meant to buy other tokens must give way to a more traditional economy. There is one project in crypto that is making real progress in the process of making the ecosystem less self-referential. More “real”
“Real” as in “Real World Assets.” RWA might be the next frontier of DeFi. Instead of relying on other digital assets, tokenomics need to find support from other traditional financial products to expand the borders of DeFi beyond the digital realm and into the real economy. This is what fiat collateralized stablecoins do, and it’s the route MakerDAO is exploring further.
Initially, their stablecoin DAI could only be backed by one single asset: ETH. Over time, other digital assets were included as club members, including other stablecoins like USDC. Today, MakerDAO has approved several initiatives that strengthen its ties with the offline economy and give DAI a more diverse scope of collateral assets.
The community recently approved via vote the creation of a vault with 100 million DAI for Huntingdon Valley Bank (HVB) as part of a new collateral type in the Maker Protocol. They have also voted for the investment of $500M in US Treasury bills and have approved a $30M loan to French bank Société Générale.
MakerDAO could thus become the gateway of TradFi into crypto.
4. NFTs | NFTs don’t take bears seriously
One year ago, we were reading about a crab market in crypto: a time of choppy, sideways movement that interrupted the “up only” trend. Back then, crypto prices and DeFi had cooled down…but NFTs hadn’t. Axie Infinity was climbing fast, and the sales at marketplaces like Opensea were booming.
Today it’s bears, not crabs, who pose a threat, but NFTs still show signs of fearlessness. Otherside, the metaverse built by YugaLabs to be the home of their collection of blue chip NFTs, took some very successful baby steps, Gamestop launched their NFT platform, flippening in just a few hours Coinbase’s marketplace, and Reddit announced their pfp NFT initiative with Polygon.
5. Stablecoins | Stablecoins after the storm
It’s been two months since Terra’s UST collapsed, spreading doubts over the stablecoin market. Centralized stablecoins have become the most generally trusted stablecoin. USDT, USDC, and BUSD account for 90% of the stablecoin market thanks to their reputation as safer assets, although that reputation is in question. In the meantime, decentralized stablecoins are rushing to innovate. This is how the different projects are faring lately:
USDT, the leading stablecoin with ~$65B market cap, wobbled for a while after the collapse. It lost its peg due to the ongoing concerns about its reserves. The stablecoin has recovered some credibility, and Tether has even announced some improvements like a Pound Sterling-backed stablecoin, but its growth speed has taken a hit due to the opacity concerning its reserves.
USDC, the next best contestant, did much better. Even in the aftermath of the UST collapse, USDC was gaining market cap while other stablecoins (especially USDT) experienced a small bank run ($7B were liquidated). USDC is benefitting from the reputational advantage of being more transparent. Although far from perfect, Circle, USDC’s parent conglomerate, has done a much better job disclosing the composition of its reserves.
Binance USD (BUSD) is the third most important stablecoin. Its success is generally attributed to the market strength of Binance. BUSD is developed by Paxos, collateralized 1:1 to cash equivalent and cash equivalent reserves, but it is mainly used inside the Binance galaxy of applications. A very successful playing field, but a gated one that doesn’t mingle too much with the rest.
DAI is the leading decentralized stablecoin. Decentralized stablecoins lost trust after the collapse of UST, even though DAI is an overcollateralized stablecoin that accepts many assets as collaterals. As we’ve seen above, MakerDAO, the DeFi project in charge of issuing DAI, has been pushing an innovative way of doing things lately.
Another decentralized stablecoin has entered the building. Aave is one of the leading DeFi protocols, and they recently took their first steps towards launching a stablecoin, the GHO. Aave leverages a very crypto-native community of users, a strong reputation, and a novel incentive mechanism, where
6. Crypto use cases | SBF’s take
Sam Bankman-Fried has taken some time between bailouts to provide thought leadership to crypto Twitter. In a recent lengthy thread, SBF outlined what he believes are the current, most solid use cases for crypto. He didn’t go too far: he focused on three use cases, payments, market structure, and social media, which are apparent low-hanging fruits. But he broke them down with simplicity, comparing them to current market leaders or real-world situations.
He compared crypto to any company like Western Union for payments and illustrated how crypto brings infinitely faster and borderless transactions.
For market structure, he revisited the Gamestop crisis, when users were shut off from trading, and how blockchain provides 24/7, decentralized censorship-resistant trading.
He took on Facebook to explain how blockchain provides interoperability and ownership of your data and social graph for social media.
Sometimes it’s that simple.
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