DeFi Total Value Locked Soars to Record –But ETH Locked is Sliding
Also, ETH gas prices soar, Yam scrapped rebase, Cover holders migrate after hack.
Hello Defiers! Exciting times in crypto with ETH trading above $1,000 and DeFi heating up. Here’s what we’re covering:
As ETH crosses $1k, DeFi is hitting its own set of milestones.
Ethereum gas prices are soaring to records
Yam Finance scrapped rebasing mechanism
Cover holders migrate to new token
And more :)
The open economy is taking over the old one. Subscribe to keep up with this revolution. Click here to pay with DAI (for $100/yr) or sub with fiat by clicking on the button below ($10/mo, $100/yr).
🙌 Together with Zerion, a simple interface to access and use decentralized finance, Neutrino, an algorithmic price-stable protocol that enables the creation of stablecoins tied to real-world assets, Value DeFi Protocol, a suite of DeFi products including the Value Liquid AMM, which allows anyone to create trading pools with flexible ratio pairs, and Cartesi, an optimistic roll-ups solution that aims to revolutionize smart contracts by allowing developers to code with mainstream software stacks, has just launched CTSI Reserve Mining.
As ETH crosses $1k, DeFi is hitting its own set of milestones.
The last time the world’s second-largest cryptocurrency reached four digits was during the blockchain mania that was early January of 2018. Unlike the last bull run, however, Ethereum is buoyed not by ICOs but by DeFi.
With dapps built on Ethereum enabling permissionless access to traditional financial services such as borrowing, lending, and derivatives trading, the current bull run has investors dreaming of prices much higher than $1k.
Graphs for some key DeFi metrics are fueling that optimism.
Total Value Locked Climbs to New Highs
Defi’s preeminent metric, Total Value Locked (TVL), is at an all-time high of $18.35B at the time of writing, according to DeFi Pulse.
As Ethereum is the platform that underpins these applications, while its cryptocurrency ETH is used as collateral, TVL’s growth serves as a positive feedback loop: increases in value locked suggest increased utility of Ethereum (the platform), which pushes the price of ETH (the currency) higher, which pushes TVL higher (as ETH constitutes roughly 40% of TVL), further suggesting utility.
ETH Locked Slides
But this time the increase in TVL has happened despite a drop in the total amount of ETH locked in DeFi. ETH in DeFi has slumped to 6.8M from almost 9.5M two months ago, near the lowest since September.
One explanation is that holders are freeing some of their ETH positions to trade the cryptocurrency amid its wild swings. With the value of their collateral increasing, that means they need to keep less ETH in DeFi protocols to maintain safe borrow ratios.
Traders may also be withdrawing ETH from decentralized exchanges to arbitrage prices on centralized exchanges, Andrew Kang of Mechanism Capital told The Defiant. The decline of ETH locked also reflects investors buying the token from AMMs, Kang said.
“The ETH people are buying needs to come from somewhere, and part of where it comes from is from LPs in AMMs DEXs like Sushiswap, Uniswap and Balancer,” he said.
This means that ether is moving from its locked positions in decentralized exchanges, to “unlocked” positions.
Total ETH locked has dropped by approximately 5% in the last week while the price has risen by nearly 50%, offsetting the decline and pushing TVL to new highs.
Worth noting is that ETH is not the only cryptocurrency locked in DeFi. As stated above, the currency represents roughly 40%, about $7B, of TVL. DeFi’s flagship metric is also dictated by locked Bitcoin, which comprises about 5% of the total valued locked, and also stablecoins, which likely make up the majority of the remaining 55% of TVL.
DeFi Tokens Rally
DeFi tokens are rallying alongside ETH, with DeFi Pulse’s Index (DPI) hitting an all-time high of $155 at the time of writing, eclipsing its previous mark of $136.03 which occurred on September 12 within days of the index’s launch.
Synthetix and Aave’s tokens, which comprise roughly 40% of the index, both climbed to record highs. Loopring too, which comprises a growing 6% of the DPI has seen a big runup of almost 50% in the past 24 hours, the second-highest among DeFi tokens on CoinGecko. Skyrocketing gas prices highlight the glaring need for the Layer 2 scaling solution used by the decentralized exchange.
DEX Volume Soars
Decentralized exchange (DEX) volume is also near an all-time high as traders move between currencies and try to ride the bullish wave as high as possible. Volume climbed to $2.6B on Jan. 3, the highest ever, except for a single day in October when $3.2B exchanged hands, with Uniswap, Sushiswap and Curve constituting more than 70% of the trades.
It remains to be seen what will happen to DEX volume in a down market. Still, the aftermath of this summer’s yield farming boom showed that, while volume declines after the market cycle peaks, a higher baseline remains.
For now though, excitement is sky-high in the Ethereum ecosystem. And DeFi’s breakout success serves as proof - even if only temporary - to crypto proponents that real utility is being built this time.
The good news: Ethereum is booming. The bad news: gas fees are, too.
ETH is surging past $1k—the highest it’s been since the crypto boom of January 2018. Investors have taken notice, with the co-founder of Three Arrows Capital hedge fund (which just made headlines for their SEC filing stating $1.3 billion in Grayscale Bitcoin Trust holdings), Kyle Davies, tweeting: “I’m warming to $ETH, to be honest...I now have a basic understanding. I own it.”
Ethereum Fees at All-Time Highs
Amidst the current demand, average Ethereum gas fees surged to an all-time high of almost $900 yesterday, according to data from Glassnode. Even simple transactions like sending ETH interpersonally can generate $10 in fees. Trading on Uniswap —the largest decentralized exchange by volune—can cost over $100 in fees.
For those unwilling to pay the exorbitant gas fees, activity slows to a near standstill.
Operations performed on the Ethereum blockchain are paid in a unit called “gas,” which is priced in ETH’s smaller denomination, Gwei.
Gas fees, which are attached to every operation on the Ethereum network, are typically insignificant—oftentimes only a few cents. But as more and more users crowd into the Ethereum space, the computational burden increases. According to the latest Etherscan data, average Gwei per transaction was 170 on Sunday. That’s the highest since September, at the peak of the “DeFi summer” when the yield farming craze overtook the space.
“The issue of a slow network stems from scaling, which is the current challenge for cryptocurrencies across the board,” wrote Genesis Mining operations head, Philip Salter in a Dec. 24 article. “How can you keep transaction fees from skyrocketing because of that slowdown?”
Deterring New Users
On one hand, major market activity persisting in spite of the gas fee increase speaks volumes to how much potential wealthy investors see in Ethereum. After all, whales won’t be deterred by $100 in transactional fees.
On the other hand, the surge in gas prices illustrates a major scalability issue that presents a roadblock in Ethereum’s path to mainstream adoption. On top of making the system less usable due to overcrowding, high transaction fees deter newer users, and especially users with less financial means, from sticking with Ethereum. Even if the space is currently populated primarily by investors and developers, the current gas fees threaten to stymie long-term growth.
“Stop being poor sure but paying nearly $100 for a $4k swap just makes no economic sense,” tweeted Larry Cermak, director of research at The Block. “...Let's be real, someone new sees this and they will likely never use that product again. Most noobs are coming in with less than $5k to allocate.”
Ethereum Layer-2 scaling solutions are aiming to tackle this issue by handling transactions off the main Ethereum chain, but to-date, none have achieved mainstream adoption within the De-Fi community. But for Ethereum’s sake, a proper scaling solution needs to come fast because competitors aren’t waiting.
YAM holders voted to remove the token’s rebase mechanisms, which expanded and contracted supply seeking to establish a stable price, after taking DeFi by storm this summer. Rebases issued and burned new tokens based on the price of YAM, targeting a $1 peg.
After migrating to YAM V2 following a smart contract exploit that caused unlimited token inflation, the project is now undergoing a third (and proclaimed final) migration to YAM V3. All YAM V2 tokens can be migrated at a 1:1 ratio for YAM V3 using the migration portal.
The rebase removal proposal also suggests implementing 3% annual inflation to continue growing the treasury. Still, there’s a separate vote against adding ongoing issuance to the protocol.
More Than a Meme
At its peak, over $800M was staked in Yam smart contracts, used to farm YAM governance tokens that seeded a community governed treasury. That treasury has since grown to ~$3.7M, giving the project a sizable runway to continue running DeFi experiments and product changes.
The Yam community now has its sight set on a suite of DeFi products, including an insurance product called Umbrella.
Combined with a synthetic asset to speculate on Ethereum gas prices called uGAS, treasury management from a top TokenSets social trader Krugman, and ambitions for a launchpad incubator, Yam seems progressing well beyond its original meme roots.
Cover is Migrating Holders to New Token After Exploit
COVER holders can now migrate from old COVER to new COVER at a 1:1 ratio, marking the fourth migration for the community-incubated insurance protocol. This also includes a WETH claim for Uniswap, Sushiswap and Balancer LPs who were providing COVER/ETH liquidity.
Outside of the migration hiccups, Cover Finance has been garnering traction thanks to Shield Mining campaigns, or the ability for liquidity providers to earn COVER for providing insurance protection on select smart contracts.
Cover said that Sushiswap liquidity incentives will start back up in the coming days, a move which enthusiasts hope will push COVER back to its place in the growing insurance landscape pre-exploit. However, other holders signalled the incident left a smidge on the project’s legitimacy. It should be an interesting project to watch in the coming months as the team looks to regain community confidence.
Crypto Heavy Weights Rallied Against FinCen Rule Change
Payments giant Square and crypto exchange Coinbase rallied against FinCen’s proposed rule chain on crypto private wallets before the deadline last night. The crypto heavy-weights were among the 6,537 comments the regulator received. The proposal would require service providers to perform KYC checks on owners of private wallets receiving funds from centralized exchanges.
The rule “would require cryptocurrency service providers like Square to keep records of and report certain cryptocurrency transaction information far beyond what is required for cash transactions today,” Square wrote. “To put it plainly — were the Proposal to be implemented as written, Square would be required to collect unreliable data about people who have not opted into our service or signed up as our customers.”
Coinbase said in a blog post directed to its users, the rule is a “substantial intrusion into your privacy without good reason — and a significantly more onerous regulation than traditional financial institutions are held to.”
Meanwhile, eight members of Congress have requested that the current 15-day comment period be extended to 60 days, noting that the American public has not been given "a reasonable opportunity to respond" to a "highly complex rulemaking".
the Treasury's Office of the Comptroller of the Currency told national banks that they are allowed to run independent nodes for distributed ledger networks. Referring to of independent node verification networks, the OCC's interpretive letter says that banks "may use new technologies, including INVNs and related stablecoins, to perform bank-permissible functions, such as payment activities."
“Futureswap aims to create a perpetuals trading experience that improves on what centralized futures exchanges offer,'“ according to a blog post by the team. V2 features include, “live pricing, more performant trading, and higher capital efficiency. Core features such as AMM style liquidity providing, incentivized usage, and community governance remain mostly unchanged.”
The Defiant is a daily newsletter focusing on decentralized finance, a new financial system that’s being built on top of open blockchains. The space is evolving at breakneck speed and revolutionizing tech and money. Sign up to learn more and keep up on the latest, most interesting developments. Subscribers get full access, while free signups get only part of the content. Click here to pay with DAI (for $100/yr) or sub with fiat by clicking on the button below ($10/mo, $100/yr).
About the founder and editor: Camila Russo is the author of The Infinite Machine, the first book on the history of Ethereum, and was previously a Bloomberg News markets reporter based in New York, Madrid and Buenos Aires. She has extensively covered crypto and finance, and now is diving into DeFi, the intersection of the two.