DeFi Research News February 2022

Stablecoin supply continues to grow exponentially despite crypto market volatility

The crypto markets have not been easy to deal with as an investor the past few months. As a matter of fact, the total crypto market cap has had a drawdown from just over 3T in November, down to ~1.5T in late January.  

Stablecoins, meanwhile, are bigger than ever, with their total market cap reaching $181B USD, or roughly 10% of the total crypto market cap, as of February 23rd, 2022, according to CoinMarketCap. Tether and USDC, the two largest stablecoins by market capitalization, rank 3rd and 5th in market capitalization overall. Four of the fifteen largest cryptocurrencies, including Binance USD (BUSD) and Terra USD (UST), by market capitalization are now stablecoins.

Algorithmic stablecoins have surged in popularity as of late with the market capitalization of Terra increasing from $2.88B during the early November market highs to over $12B in February 2022. In fact, the market capitalization of UST surpassed that of DAI, the largest algorithmic stablecoin on Ethereum, in December 2021 and continues to take a larger and larger lead over the rest of the algorithmic stablecoin market. 

Even in a heavy risk-off environment that we’ve experienced the past few months, it would seem that the increase in stablecoin supply may suggest the inevitable growth of the digital economy. 

First Ever Home Sold as NFT

NFTs continue to make an impact in multiple sectors of the economy, and the proliferation of this new technology is creating use cases that would otherwise not exist. The real estate sector has shown interest in blockchain technology recently because it introduces new models like fractional ownership, cryptocurrency-backed mortgages. 

Propy, the largest real estate focused protocol in the cryptocurrency market, was the first company to launch a real estate based NFT in 2021. They gained notoriety for launching the first real estate NFT auction in the USA, which resulted in a home in Tampa, Florida selling for roughly 210 ETH earlier this month, worth $650k USD at the time. The Propy protocol also plans to allow real estate NFTs created through the protocol to be used as collateral for cryptocurrency-based lending and borrowing in the future.

Bringing real-world assets on-chain has become more than a trend with several protocols including Centrifuge, Goldfinch, and Maple, receiving over ~$800M in TVL to back various products or organizations with affordable funding. Centrifuge, for example, takes an asset-agnostic, wide-ranging approach that allows companies to bridge various forms of real-world assets over to the DeFi space by creating an open marketplace for investors to seek yield by investing in pools ran by institutional investment funds in various industries including real estate and cargo & freight.

DeFi’s first syndicated loan for Alameda reaches 100M USD 

Alameda Research, the largest cryptocurrency trading desk today, have taken out loans on decentralized lending protocol Maple Finance surpassing $100M USD. The firm hopes to scale towards the target of $1B of active debt within the calendar year.

Lenders to Alameda included popular crypto-marketplace Abra, blockchain based betting platform ZedRun, and cryptocurrency lending firm CoinShares. Orthogonal Trading, one of the Pool Delegates on Maple Finance responsible for matching lenders and borrowers, restricts their pool to accredited non-US institutions that have gone through extensive KYC and due diligence checks. 

Launched just 9 months ago, the total amount of capital provided to the various lending pools on the Maple Finance protocol has reached over $611M USD, with more than $683M USD of loans originated in that time. The exponential growth of Maple Finance proves the allure of lending to high quality, large scale borrowers around the world, previously only accessible to local clients of traditional banks. Source

OpenSea Phishing Attack

OpenSea, the largest non fungible token (NFT) marketplace built on the Ethereum blockchain, was the victim of a phishing attack earlier this week, within hours of announcing their week-long planned upgrade to delist inactive NFTs on their platform. This resulted in a hacker getting away with approximately two million dollars worth of NFTs.

OpenSea announced a smart contract upgrade late last week, which required users to port their actively listed NFTs from the Ethereum blockchain to a new smart contract. Users who don’t migrate their holdings risk losing their old, inactive listings as a direct result of the upgrade. Users were also incentivized to make the switch with no gas fees. 

Further investigations showed that the hackers were using phishing emails to gain access to the NFTs before they were ported over OpenSea’s new smart contract. The attackers gained access to the NFT as soon as a user authorized the NFT migration from the fraudulent email. Users were told to be careful of all communications from OpenSea and to revoke all permissions on their account for migrating to the new smart contract while the investigation is resolved.

US lawmakers reintroduce bill to stop IRS from taxing crypto transactions under $200 

According to an updated draft of the Virtual Currency Tax Fairness Act of 2022, Suzan DelBene, a representative for Washington’s 1st district, is seeking to revise the Internal Revenue Code of 1986 to exclude gains from certain personal transactions using virtual currency. This change, if put into place, would stop the IRS from requiring US income tax filers to be liable on capital gains taxes on virtual currency for transactions worth less than $200 USD. 

“Antiquated regulations around virtual currency do not take into account its potential for use in our daily lives, instead treating it more like a stock or ETF,” said DelBene. “Virtual currency has evolved rapidly in the past few years with more opportunities to use it in our everyday lives. The U.S. must stay on top of these changes and ensure that our tax code evolves with our use of virtual currency."

This is the third version of the bill that Congress has received, with neither of the previous versions of the bill receiving a vote. Representative David Schweiker proposed a bill exempting crypto transactions under $600 from capital gains taxes in 2017. He also co-wrote the current version of the bill with DelBene. The two representatives reintroduced the bill in 2020 under the same name with the threshold lowered to $200. Fellow pro-crypto Representatives Darren Soto and Tom Emmer sponsored the 2020 iteration of the bill, as well as this most recent iteration.

SingleSidedBalancer Strategy Vulnerability Disclosure via Yearn

When there is a security vulnerability discovered, it does not always imply lost funds for users. DeFi developers are among the brightest in the world and are incentivized to make sure their protocols are safe so users feel safe investing their capital in smart contracts to earn yield.

This is the case for Yearn earlier this week. According to their GitHub page, “An attack vector in the SingleSidedBalancer strategy was disclosed by a security researcher and was mitigated by the security team within 25 minutes of its receipt. Funds are safe, there were no losses.”

The exploit was possible because of a flaw in their smart contract algorithm design which is described as “assigning withdrawal losses to the strategy itself and not to the specific user”. The affected yvUSDT strategy was turned off and adjacent strategies that could also suffer from vulnerabilities were successfully removed from the withdrawal queue while the relevant code was fixed. The patched strategies were then deployed and the migration to the updated version was completed near-instantly.

In line with its security process, Yearn's security team chose to award the disclosing security researcher with the maximum possible bounty reward of $200,000. This reward ensures that talented smart contract developers who find vulnerabilities that slip through the cracks are rewarded for their efforts and that they don’t feel a need to use their skill for malicious purposes by stealing funds from an otherwise flawless protocol. 

Cryptocurrency playing a role in crowdfunding Ukraine, Russia defending itself from being cut off from the SWIFT Network, and Canadian Government retaliation for donations to the Freedom Convoy

Countries around the world, including Canada, the USA, the UK, and Europe, have placed sanctions on Russia for its recent military invasion of Ukraine, with some of these countries also calling for Russia to be banned from the SWIFT banking network, currently used by financial institutions in over 200 countries. This may lead to Russia adopting cryptocurrency as an alternative payment rails to transfer funds or engage in commerce. 

The other side isn’t missing out on the benefits of cryptocurrency either - Ukraine has fortified its coffers with large donations from various Decentralized Autonomous Organizations including UkraineDAO and Unchain Fund. In addition, nearly $400,000 in Bitcoin was donated to Come Back Alive, a Ukrainian nongovernmental organization providing support to the nation’s armed forces.In fact, Ukraine has already spent over $10 million dollars in donated cryptocurrency to purchase war supplies, as reported by Coindesk. 

On the other hand, Canadian Prime Minister Justin Trudeau invoked emergency rules last week, freezing truckers’ bank accounts who participated in the Freedom Convoy in Ottawa this past month. However, much to the Canadian government’s surprise, they were unable to immediately freeze their non-custodial Bitcoin wallets. 

Both Kraken CEO Jesse Powell and Coinbase CEO Brian Armstrong suggested that users who wanted to donate cryptocurrency to the Freedom Convoy protest, do so from non-custodial wallets, in response to a press release from the Government of Canada saying that cryptocurrency donations to the Freedom Convoy will be considered terrorist funding. In response, the Royal Canadian Mounted Police are investigating the tweets for violating sanctions put in place to curb the Freedom Convoy protests.