DeFi Update

  • Following 4-day rally, e-minis rejected 100dma yesterday with lackadaisical earnings from FB (-26% -> why are we even trading crypto?!), which cut 0.6% from S&P 500’s market-cap; contagion was also seen in TWTR, PINS, SNAP share price. On the bright side, after-hour earnings from AMZN, SNAP sent the stocks and broader Nasdaq/e-minis on strong rebound.
  • Market also noting hawkish tones from ECB and BOE
  • We have: NFP numbers tonight, and Winter Olympic’s starting 🙂
  • Following 12-days of consolidation, BTC failed to break above the downtrend since November; short-term bearish, and selling the rip is the name of the game. We expect unpredictable earnings in the equities markets to continue driving crypto price action, but with downside-bias.
  • In terms of headlines:
  • Indian government clarified their stance on crypto — TLDR; crypto is legal in India + 30% on the sale of crypto assets + Indian CBDC to be launched in April by RBI
  • $2.5bn worth of bitcoin (64,643 bitcoins to be precise) stolen from Bitfinex in 2016 showed movements this week
  • ETH (+16%) outperformed most L1s (DOT +6%, LUNA -5%, AVAX +9%, ATOM -2%, NEAR +7%, etc.) with the exception of SOL
  • Major smart contract platforms all took a hit to their TVL despite mixed price actions in the underlying tokens
  • Biggest losers in TVL are: SOL (given the Wormhole exploit — more on this below), CELO and NEAR
  • Biggest non-losers in TVL: FTM, ALGO
Chart 1: TVL of Various Smart Contract Platforms
  • On the exploit: Wormhole, Solana’s bridge, was manipulated into crediting 120k ETH as having been deposited on Ethereum, allowing hacker to mint the equivalent in whETH on Solana. The exploiter was able to spoof guardian signatures (Wormhole failed to properly validate all input accounts) to mint 120k whETH, and bridged 93,750 back to Ethereum, while the rest has been liquidated on Solana into USDC and SOL. Wormhole has since offered $10mio bug bounty, and Jump (who bought Wormhole from Certus One) has since replenished Wormhole’s reserves
  • At one point, whETH was trading at ~20% discount to ETH, while FTX was still accepting whETH deposits, creating a nice arbitrage opportunity there
  • On the broader level, bridges are, after all, still smart contract codes (just like DEXs and lending protocols), and adds additional vulnerability independent of security of the blockchain. Interoperability is not costless, and fragmentation of liquidity due to multiple bridging solutions is a problem that many projects will try to solve.
  • What’s Qubit Finance: BSC money market platform (lending + borrowing)+ Ethereum-BSC Bridge operator
  • What was the exploit: Qubit allows for cross-chain collateralisation (which was audited in Dec’21 by Theori), i.e. users can lock assets on Ethereum to borrow against on BSC via the QBridge deposit function; the hacker(s) took advantage of a logic bug in the code which made xETH available for use on BSC without having deposited ETH on Ethereum. The hacker(s) then used this collateral to borrow multiple BSC-tokens, and swapped everything for a total of 200k BNB. Since then, Qubit has offered $2mio bounty to the exploiter.
  • What is Solana Pay: a new payments protocol that will allow users to send digital dollar currencies from their wallet directly into the merchant’s account. At launch, Solana Pay will enable near-instant settlement at minimal cost for USDC payments at participating merchants. Qualified businesses can also access Circle Yield
  • Why does digital payments matter: according to Visa, ~73% of small businesses said accepting digital payments is fundamental to growth in 2022, and ~59% said they already are, or plan to, use only digital payments within the next 2 years.
  • What’s the deal: Users can now directly mint and redeem USDC on Flow, enabling easier access and larger liquidity pools for network users, and allowing developers to use Circle’s API. Circle previously announced a partnership with Dapper in 2020 to enable USDC as a payment processor and custodian for Dapper wallet users. In addition to Flow, Circle now supports USDC natively across the Ethereum, Algorand, Solana, Stellar, Tron, Hedera and Avalanche blockchains.
  • What is 01.xyz: derivatives DEX on limit orderbook, featuring perpetual futures, power perpetuals (soon), and cross-collateralization/margin across markets. The project is being marketed as decentralized FTX
  • What’s in v2:
  • Strategy vault: USDC as deposit asset with a lending optimization strategy — the vault optimizes lending rates across multiple venues (Tulip/Solend/Mango), ensuring the pool is accessing the best aggregated lending rate across the entire ecosystem
  • Composability: deposits in strategy vault will generate transferrable vault shares, allowing protocols to compose on Tulip
  • Swap: integrated Jupiter aggrgator
  • What’s the deal: Pangolin attributed the move to be part of their commitment to support decentralized algostables. USD-backed stablecoins, such as USDC and USDT have been the dominant stablecoins in terms of liquidity in the DeFi space. USDC’s Circle has especially been very aggressive in the Solana ecosystem, investing heavily in Solana-projects via Circle Ventures to encourage USDC adoption as the de-facto stablecoin. However, as recent regulatory developments have shown, centralized stablecoins are likely to be regulated, and there are more and more people calling for decentralized stablecoins for decentralized space. Even MakerDAO’s DAI seems to be exploring the regulated route, as evidenced by recent proposal on MakerDAO Forum. In the decentralized stablecoins side, UST, MIM, FRAX have emerged and growing, with distinctive strategies.
  • What’s the deal: 1inch Earn is a set of liquidity pools operating on a model similar to Uniswap V3 range orders (i.e. concentrated liquidity) and optimized for stablecoins. Earnings come from fees on swap trades in the pool. The target APY is expected to be 5–10%
Chart 1: Bitcoin, Ethereum, DeFi
Chart 2: Smart Contract Platforms
Chart 3a: ETH Ecosystem
Chart 3b: BSC Ecosystem
Chart 3c: Polygon Ecosystem
Chart 3d: AVAX Ecosystem
Chart 3e: SOL Ecosystem
Chart 3f: Terra Ecosystem
Chart 4: Algostables
Chart 5a: DEX Ecosystem
Chart 5b: Lending Ecosystem
Chart 5c: Synthetic Ecosystem

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