DeFi Research News August 2022

In this edition of our monthly Research News Update, Here are the topics we discuss:

• DeFi TVL drops by 7.7%
• Institutions are starting to get interested in Ethereum 
• The Macro cycle seems to be in tightening mode
• Tether (USDT) reserves are improving
• US Treasury Sanctions Tornado Cash (an open-source code)
• TradFi institutions launch multiple crypto-focussed ETFs
• Reddit Explores Arbitrum Chain For A Community Token
• Coinbase partners with BlackRock 
• HOLDNAUT (crypto lender) facing police proceeding and job cut
• CELSIUS might be running out of money by October
• NFTFi partners with GnosisSafe to launch NFT Rights Management Wallet
• Ethereum Mainnet Merge announced for Sep 6, 2022
• Bitcoin on-chain metrics show signs of downward exhaustion and,
• A look at the top DeFi protocols based on the fees generated

DeFi TVL(Total Value Locked)

Earlier in August, the DeFi TVL (the value of user funds deposited in a DeFi protocol) was ~$65 Billion. By August  31st, it was ~$60 Billion. That is a 7.7% decrease in the month of August. 

If we look at individual protocols, MakerDAO tops the list at an average TVL of $8.5 Billion over the past 30 days followed by Lido Finance at $7.5 Billion. Last month, Curve ranked #3 in TVL however Uniswap outperformed curve’s TVL this month and came at the #3 spot at $6.1 Billion in TVL. 

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According to CryptoCompare’s latest report, Ethereum investment products increased by 2.36% to $6.81 billion in assets under management (AUM) throughout August, outperforming Bitcoin products which saw a 7.16% drop off to $17.4 billion. We believe the institutional interest is moving away from Bitcoin in the short term, as Ethereum-based products hold the attention with the much-anticipated merge happening in September. Coinchange wrote an entire blog on ‘Why Institutions Are Choosing Ethereum’ which covers two crucial aspects of Ethereum

• Can ETH yield be treated as a Bond Yield for Web3?
• The shift in the ESG Narrative for Institutions

Click here to read the full article.

Macro View

US Business Cycle, Inflation, and the European Energy Crisis

The global economy continues to slow down, with major trouble in Europe, and softness in the United States and China. The S&P 500’s recent rally hit some resistance just under the widely-used 200-day moving average and is at risk of rolling into negative momentum. 

The broad money supply, and specifically the bank deposits, have not increased since Jan 2022. This is the longest stretch of flat bank deposits and flat broad money supply in over a decade as seen in the chart below:

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Headline consumer price inflation reached a local top in June, with July and August slightly down owing to the recent drop in energy prices. Rent and owner’s equivalent rent are still going up in year-over-year terms but several other areas of the CPI calculation have rolled over in year-over-year terms. The overall demand seems to be slowing from the tightening of both fiscal and monetary policy. 

On the other side of the globe, Europe continues to face extremely high energy prices and the possibility of outright shortages. According to a Bloomberg article published on August 19, 2022, “Europe’s industrial heartland faces a potential exodus as manufacturers of German car parts, chemicals, and steel struggle to absorb power prices that rocket to new highs almost every day.” 

Europe continues to be in a very dangerous place economically, with high debt, little structural growth, and significant energy shortages.

Regulations and Institutional Update

Tether (USDT) reserves are improving

Tether (the company behind USDT stablecoin) is reducing its commercial paper allocation and increasing its exposure to the US Treasury Bills amidst a bad macro outlook.

Recently USDC (Tether’s competitor) took a huge market share away from USDT. It looks like Tether is working to make its balance sheet more robust in its ability to meet its reserve requirements for redemption. 

US Treasury Sanctions Tornado Cash (an open-source code)

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On August 8, 2022, US Treasury sanctioned virtual currency mixer Tornado Cash. It still operates freely on the blockchain but is illegal for Americans to use, and large portions of the network stakeholder have censored it even for many non-Americans. This move certainly will have much wider implications for the broad digital asset ecosystem and cryptography/privacy in general. Many Ethereum users use Tornado Cash for normal privacy reasons as it mixes their assets around with those of many other users thus making it hard to trace the transaction trail. However, when various entities exploit poorly-written DeFi smart contracts and steal the funds, they too often run the money through Tornado Cash. This is money laundering and Tornado Cash has been used to launder more than $7 billion worth of virtual currency since its creation in 2019. This number is estimated to represent around 25% to 30% of funds sent to mixers coming from illicit addresses.  Third-party node operators like Infura and Alchemy blocked access to Tornado Cash once it was sanctioned, and so did the big stablecoin issuers such as USDC and USDT. 

Coinchange is monitoring this space in a legal sense as it relates to digital asset ecosystem risk. While many governments have accepted that digital assets are here to stay in some form, the concept of private transactions is one that they seem willing to push back hard against. 

Institutions that participated in the Digital Asset space

In the midst of the macro and regulatory chaos, TradFi institutions continue to launch crypto-focused ETFs and build partnerships with crypto businesses. Here is a list of all the institutional participation according to CryptoCompare:

1. Charles Schwab Files Prospectus for Crypto-Themed ETF on August 1st
2. Betashares Launches Australia’s First Metaverse ETF on ASX on August 3rd
3. SoFi Debuts ETF Focused on NFTs, Blockchain Tech, Metaverse on August 9th
4. BlackRock Launches Spot Bitcoin Private Trust After Coinbase Partnership on August 11th
5. 21Shares and ByteTree’s BOLD stand firm despite market conditions

Major News/Event in August  

Reddit Explores Arbitrum Chain and FTX For A Community Token

Reddit, the popular social media platform with 400M monthly users and hundreds of thousands of topic-specific communities known as “subreddits,” will enable its communities to issue Ethereum-based tokens known as Community Points as per Defiant

Coinbase and BlackRock Partnership

On Aug 4th, Coinbase announced that they are partnering with BlackRock, the world’s largest asset manager, to provide direct access to crypto to the institutional clients of Aladdin®, which is BlackRock’s end-to-end investment management platform. Their first choice of asset is Bitcoin. Coinbase Prime will provide crypto trading, custody, prime brokerage, and reporting capabilities to Aladdin’s Institutional client base. Click here to read the details in our article on the Coinchange blog.

HOLDNAUT (crypto lender) facing police proceeding and job cut 

According to Hodlnaut’s blog post, they laid off 80% of its staff (around 40 employees) and slashed all open-term interest rates to 0% APR from 22 August in an attempt to “stabilize their liquidity” and cut costs. Their founders are “working hard on a recovery plan” 

CELSIUS might be running out of money by October

A new court filing shows the financial projections that Celsius will run out of cash by October and it reveals that they hold $2.8 billion less in crypto than what they owe to depositors. In the monthly cash flow forecast, they had a cash balance of about $130 million at the beginning of August. With the ongoing operating expenses and restructuring efforts, it is projected that they will have a negative $33.9 million balance by October. 

NFTFi partners with GnosisSafe to launch NFT Rights Management Wallet

The leading liquidity protocol for NFTs, NFTFi is partnering with Safe, a crypto wallet platform securing over $40 billion in digital assets, to create the first NFT Rights Management Wallet. This will enable users to use their NFTs on multiple protocols without transferring them to those protocols. For example, the NFTs stay in the wallet (i.e. users maintain the ownership) while being used as loan collateral, and being displayed at an art gallery all at the same time. This is a huge step towards the inclusion of NFT as an asset in the larger digital asset ecosystem. Click here to read our NFT Financialization in detail 

On-Chain Metrics & Data

Ethereum Mainnet Merge

Speaking of on-chain data, the biggest on-chain event to happen in the history of crypto is the Ethereum blockchain’s transition from Proof-of-work (PoW) to proof-of-stake (PoS)! However, there is uncertainty on whether some members of the community would continue to use the PoW hard fork. 

Coinchange will support the PoS chain as the majority of the protocols and stakeholders will operate there. Multiple centralized exchanges, stablecoin issuers, and DeFi protocols have signaled their full support for the merge while attesting that a PoW hard fork would not change their decision. The merge has been delayed several times as it is critical to get everything right since tens of billions of dollars are on-chain. DeFi users do not have to change anything but the node operators need to upgrade their software to support the merge. Coinchange is following the merge progress and has positioned itself to update the infrastructure accordingly.

As a reminder Ethereum Consensus layer will have a network upgrade on September 6th named Bellatrix, then the merge will happen between September 10th to 20th with the Paris network upgrade and the merge will be final around 12 minutes after the Paris upgrade

Bitcoin Update

After a persistent two-month rally, bitcoin’s price (and other crypto prices in general) came under pressure. It continues to be highly correlated to the US stock market. It can be seen from the chart below that the bitcoin price has hit the realized price according to the 200-day moving average. Historically this has proven to be a bottoming signal but since the macro environment is much different this time, there might be some more downside volatility to come. 

However, Lightning Network, a Layer-2 payment system that consists of interconnected smart-contract channels on top of the Bitcoin network, continues to grow in adoption, and usage. Arcane Research published a great analysis of the Lightning network’s current scale back in April 2022, which shows a ~410% YoY growth in payment volume as shown in this chart below. 

Additionally, hardware wallet providers are seeing increases in revenue in this bear market. Pascal Gauthier, CEO of hardware wallet firm Ledger, told Cointelegraph “Every quarter we are doing as much revenue as the whole of 2020”. This could indicate that many are preparing to buy and hold for the next bull run. 

A look at the top DeFi protocols based on the fees generated

And finally, let’s look at the top DeFi ecosystems in terms of fees generated. This table from cryptofees.info shows that Ethereum is still the leader with an average daily fee of $2.6 million! At the #2 spot in Binance Smart Chain and at the #3 spot is the lending protocol AAVE which is generating close to $0.5 million in fees. This pushed Uniswap from #2 to #4 this month. And lastly, Synthetix takes the #5 spot replacing Bitcoin from the previous month. 

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