DeFi Research News January 2024

DeFi TVL Updates

Key DeFi Stats for January:

In January, the TVL increased moderately in dollar terms from around $54.64B to $57B for the whole DeFi market. DEX 30day volumes have gone up to $74 B in dollar terms after more than doubling from September at $35.2B. 

Source: Stablecoin marketcap Jan 1 to Jan 31 2024 | Defillama

Stablecoin market cap continued to trail up slightly from ~$130B to ~$135B ending on a positive note. The top two, USDT ($96.3B) and USDC ($26B) accounting for almost 90% of the total market cap.

Here is the top 5 rankings of decentralized finance (DeFi) projects based on Total Value Locked (TVL):

• Lido Finance has held the number one spot in terms of TVL since January 2023, surpassing the previous leader, MakerDAO. Lido Finance's TVL is approximately $23 billion, up another $2 billion from last month.
• Arbitrum bridge took the second spot, with a TVL close to $7 billion.
• AAVE  slid to third place with a TVL of $6.9 billion.
• MakerDao slid to fourth place with a $5.8 billion TVL and
• Uniswap is in the fifth position with a TVL of around $4.1 billion.

Source: Token Terminal. TVL of top protocols

Macro View

The State Of The US Economy

Balanced Money Flow: Money is flowing well in the US mainly because the government is using a special method (called the reverse repo facility) to help pay for its bills (T-bills). This method is working well and balancing out another action where the Federal Reserve (the central bank) is reducing its spending, which could make money flow less easily.

The following chart shows global liquidity, which in this context is the global broad money supply (from the top several currency blocs) denominated in dollars:

Source: Lyn Alden Newsletter

Lots of Money Moving Back into the Economy: In the last three months, about $200 billion has been put back into the economy each month through this special method (reverse repo facility). If this keeps up, this method will use up all its resources by mid-April.

Big Banks are Getting More Benefits: Larger banks are benefiting more from these money flow measures compared to smaller banks, especially in the last six months.

Dollar Getting Stronger: After dropping a bit in November and December, the value of the US dollar is going up in January. A stronger dollar can make it harder for global money flow because many debts and contracts are measured in dollars.

Source: U.S. BUREAU OF LABOR STATISTICS, All Items, Not Seasonally Adjusted

Starting in early 2020, there was a noticeable increase in the CPI, which became more pronounced as time progressed. There was a sharp and significant rise that peaked in the third quarter of 2021, where the CPI reached its highest point on the chart, slightly above the 8.0 mark. Since then, it has been on a decline and looks like it is stabilizing between 3 and 4%, still more than double the rates seen before the 2020 increase.

Regulations Update

The CFTC's 2024 DeFi Report and the Path Forward for Regulation

The subcommittee on digital assets and blockchain technology, Technology Advisory Committee (TAC) of the U.S. Commodity Futures Trading Commission (CFTC) published a report on Jan 8th 2024 related to Decentralized Finance (DeFi). The report highlights several crucial aspects of the rapidly evolving DeFi landscape and the challenges it poses to regulators and policymakers.

Firstly, the report emphasizes that DeFi is characterized by highly automated financial networks that lack a central authority, making them resistant to single points of failure and censorship. However, it acknowledges that DeFi systems vary in their level of decentralization, spanning a multi-level spectrum, raising the need for a nuanced regulatory approach.

The report identifies a range of risks associated with DeFi, including fraud, market manipulation, security vulnerabilities, and the potential for illicit finance activities. It also raises concerns about the impact of DeFi's growth on national security and U.S. leadership in the global financial landscape.

To address these challenges, the report outlines several core issues for policymakers to consider:

• Defining regulatory jurisdiction: Policymakers must determine where DeFi systems fall within the existing regulatory framework, considering subject matter and geographic jurisdiction.

• Expanding the regulatory perimeter: After assessing the risks associated with different DeFi models, policymakers should decide where in the DeFi stack regulatory compliance responsibilities should be located.

• Crafting regulatory responses: Policymakers have a range of regulatory strategies at their disposal, from disclosure and reporting requirements to governance and product regulation.

• Enforcing responsibility in decentralized systems: Regulators face the challenge of holding entities accountable in DeFi systems that often lack centralized governance.

• Mapping counterparty exposures: Policymakers should monitor interdependencies across DeFi balance sheets to identify potential contagion risks.

• Oversight of technology: Regulatory authorities need to evolve their capabilities to keep pace with rapidly changing DeFi technology.

• Ensuring policy objectives: Policymakers must ensure that DeFi adheres to critical policy objectives, such as expanded access, transparency, and responsible governance.

• Mitigating unique threats: Special attention should be given to addressing the unique risks posed by DeFi without stifling innovation.

• Building DeFi infrastructure: Policymakers can play a role in fostering standards, research, and identity infrastructure to support responsible DeFi development.

• Promoting dialogue with industry: Policymakers should facilitate constructive discussions with industry stakeholders to drive meaningful progress and partnerships in the DeFi space.

At Coinchange we believe that it is our responsibility to speak with the regulators and lead the regulatory efforts so that the bridge between TradFi and DeFi can be a smooth transition. 2024 will likely see more institutions coming into DeFi given that regulators across the globe have started talking about making DeFi safer. The lowest hanging fruit in the regulatory landscape is Stablecoins, which is the next topic. 

Senators Introduce Legislation to combat the illicit use of crypto assets

Recent legislative efforts by U.S. Senators have focused on addressing the illicit use of crypto assets through two major bills aimed at enhancing the regulatory framework around cryptocurrencies to combat money laundering, sanction evasion, and other illicit financial activities.

The Preventing Illicit Finance Through Partnership Act of 2024, introduced by Senators Bill Hagerty (R-TN) and Cynthia Lummis (R-WY), seeks to foster communication between federal law enforcement agencies and private companies to combat illicit finance. This bill proposes a pilot program for federal agencies and the private sector to share information related to illicit finance. The program, chaired by the Attorney General, would involve 20 voluntarily participating money services businesses and cryptocurrency companies. This initiative aims to enhance the detection and disruption of bad actors in the crypto space by providing a channel for private companies to alert federal agencies to suspicious money transfers and sanctions evasion​​.

Coinbase vs SEC Saga Continues

In a New York federal court hearing, Coinbase argued for the dismissal of a Securities and Exchange Commission (SEC) lawsuit that accuses it of selling unregistered securities. Coinbase's lawyer, William Savitt, contended that tokens traded on the exchange are not securities since purchasers do not acquire any rights as they would with stocks or bonds, likening it to the difference between buying a company named Beanie Babies Inc. and the actual Beanie Babies toys.

The SEC, through its lawyer Patrick Costello, countered by emphasizing the distinction between buying a tangible collectible, such as a baseball card, and investing in a token on Coinbase. Costello argued that purchasing a token involves investing in the network behind it, making it inseparable from an enterprise involvement, unlike a mere collectible.

An analysis by Stein suggested that while Coinbase may not win the current motion to dismiss, there is a 70% likelihood of the company eventually prevailing against the SEC. Stein speculated that even if the case proceeds, it is likely to reach the Supreme Court, where the definition of what constitutes a security under U.S. law, currently based on the Howey standard, could be narrowed.

Institutional Update

BIS Innovation Hub to Launch Blockchain Tokenization Project and Enhance CBDC Privacy Study

The Bank for International Settlements (BIS) Innovation Hub is working on launching a blockchain project for tokenization and enhancing its study on privacy in central bank digital currency (CBDC) payments. The BIS announced six new initiatives for its 2024 work program, focusing on areas such as cyber security, financial crime prevention, CBDCs, and green finance.

A key project, named Project Promissa, is a collaboration with the Swiss National Bank and the World Bank to create a digital platform for tokenized promissory notes using blockchain technology. This project aims to improve the management and transparency of promissory notes, which are currently mostly paper-based and are crucial for the financial system. The BIS plans to complete this proof-of-concept by early 2025.

Additionally, the BIS Innovation Hub's Hong Kong Centre is continuing Project Aurum, focusing on the privacy aspects of CBDC payments. This project, in partnership with the Hong Kong Monetary Authority (HKMA), aims to develop a comprehensive CBDC system that includes both wholesale interbank and retail e-wallet components. Project Aurum explores the creation of two types of tokens: an intermediated CBDC and a CBDC-backed stablecoin, to enhance privacy and efficiency in the CBDC ecosystem.

Forbes Dives into Web3 with Connect Wallet, Partnering with Magic for a New Digital Experience

Forbes has entered the Web3 space with its Connect Wallet initiative, directly addressing the skepticism around Web3's lack of widespread adoption. This move offers more than a crypto storage solution; it opens up membership to an exclusive Web3 community where contributions significantly matter. By linking a wallet, users gain free access to premium content, a say in Forbes' content strategy, early access to Web3-related materials, and expert investment advice. Forbes chose Magic as its Web3 partner for its ease of use and reliability, highlighting Magic's experience in creating over 25 million wallets for major brands. This collaboration between Forbes and Magic signals Web3's broader accessibility and potential for a more personalized online experience, showcasing the technology's relevance beyond niche communities.

Capital Raises in December

Source: ICO Analytics

The above image lists the fundraising rounds for top 5 projects in the crypto sector for the month of January 2024. Here's a summary of the raises:

• HashKey Group raised the highest amount with $100 million in a Series A round. HashKey Group is a diversified blockchain enterprise operating a Hong Kong-based crypto exchange and offering services in asset management, blockchain node validation, tokenization, and Web3 NFT incubation. 

• Flowdesk followed, with a $50 million raise in their Series B round. Flowdesk is a French financial firm providing crypto market making, OTC trading, and treasury management services, including a Market Making as a Service tech solution for liquidity and trading strategy management on global exchanges.

• Sygnum secured $40 million in a Strategic round. Sygnum is a licensed Swiss-Singaporean digital asset bank that provides banking and asset management services, enabling institutional and private investors to invest traditional currencies in digital assets.

• Portal raised $34 million in a Seed round. Portal is a Bitcoin-based decentralized exchange (DEX) and wallet that offers Layer 2 atomic swaps for secure, trust-minimized cross-chain cryptocurrency transactions without the need for intermediaries or wrapped tokens. 

• Polymer Labs raised $23 million in a Series A round. Polymer Labs is developing an Ethereum interoperability hub that leverages Ethereum Layer 2 networks and the Inter-Blockchain Communication Protocol (IBC) to enhance security and enable secure and efficient communication across different blockchains without new trust assumptions.

A total of $247M was raised by the top 5 raises in January 2024, compared to $563M in December. The sectors this month are once again very diversified; from a Market Making company to a Bank, to Bitcoin Layer-2 Applications and even Interoperability networks. Money has started flowing into deals from all types of VCs. 

On-Chain Metrics & Data

Bitcoin Update

This one is a bit longer section for the month because we had one of the most important events to happen to Bitcoin and that is the ETF approval. So grab a drink and some snacks, and let’s go on a journey!

Price Update

The performance of Bitcoin (BTC) in January 2024 has been quite dynamic. Here's a summary: 

Early January 2024: Bitcoin began the year with a strong performance, blasting through $45K​​.

Mid-January 2024: The price saw fluctuations with highs and lows, as seen in the daily price data:

January 1, 2024: Opened at $42,280.24 and closed at $44,167.33.

January 15, 2024: Opened at $41,715.07 and closed at $42,511.97​​.

January 31, 2024: The price of Bitcoin on January 31, 2024, was $42,632.25

Coinchange hosted a twitter/ X Space on this topic with Stephan from SUNZU Labs and here is what we discussed:

In financial markets, it's common for asset prices, like a Bitcoin ETF, to rise on speculation before an event and then drop afterwards, despite expectations. But once the event happens and is already factored into the price, the market often corrects, leading to a decline. This pattern results from a mix of initial speculative buying and subsequent selling by those who waited for the event to unfold, leading to a shift in the balance between buyers and sellers. 

What do the BTC ETF Volumes Tell Us?

Interpreting trading volumes, especially in the crypto space, is challenging due to the lack of comprehensive reporting like the consolidated tape in U.S. equities, which aggregates all trade information. In crypto, trades can occur privately without the obligation to report, making it difficult to gauge true market activity from visible volumes. Thus, visible trading volumes may not provide a complete picture, as they only reflect the transactions participants choose to make public, omitting potentially significant off-exchange (OTC) trades.

In the crypto market, trading volume is primarily recorded on centralized exchanges, while peer-to-peer (P2P) transactions may be partially included, which means they don't directly influence the publicly visible price action. Transactions settled off-chain involve a direct exchange between buyer and seller without affecting the exchange-reported volumes. This can lead to a lack of transparency in market activity, as significant volumes through mechanisms like over-the-counter (OTC) trades or direct deposits (e.g., Grayscale depositing into Coinbase) remain unreported. Additionally, market participants can easily obfuscate their trading activity by using multiple wallets or spreading transactions across different exchanges, complicating the true assessment of market volume and activity. This lack of transparency can lead to manipulative practices, making it even harder to trust visible price and volume data. This is an issue in crypto markets, where unlike traditional finance, price may not incorporate all available information, leading to incomplete price indicators for investors.

After the approval of the ETF, SUNZU Lab observed no major clear changes in volume across top crypto exchanges, suggesting that on-exchange activities remained stable. However, it's noted that some of the ETF-related bitcoin volume might have moved to over-the-counter (OTC) transactions, which are less visible and off-exchange.

How does an ETF’s creation-redemption mechanism work?

The Spot Bitcoin ETFs track the spot price of Bitcoin and adjust their holdings based on deposits and withdrawals by creating or redeeming shares. This process influences the market when ETFs need to buy or sell the underlying Bitcoin to balance their holdings, affecting exchange volumes. There are two main ways to engage with ETFs: directly through the sponsor via the creation-redemption process (typical for institutional investors) and buying or selling ETF shares on exchanges (common for retail investors). The creation-redemption process ensures ETFs trade at their fair value, eliminating premiums or discounts seen in closed-ended funds. Monitoring both the trading volume on exchanges and the creation-redemption activity provides insights into retail versus institutional engagement and the overall market dynamics, offering a clearer understanding of capital flows in and out of Bitcoin ETFs. The focus going forward will be on monitoring the volume traded on traditional stock exchanges (ETF share volume + creation/redemption) and the volume on crypto exchanges (Spot Volume) to understand how investor interest may be shifting towards the ETF for its ease of trading compared to spot Bitcoin. This could provide more reliable price information for Bitcoin, as the ETF's price and volume data are less likely to be manipulated. 

Will there be 10+ bitcoin ETFs 5 years from now? 

The availability of a Bitcoin ETF introduces a reliable method to track institutional engagement in the cryptocurrency market through the observation of ETF issuance and redemption. Additionally, ETFs can be incorporated into various investment portfolios, allowing for transparent tracking of Bitcoin exposure across different investor types. Fund managers are required to disclose their holdings, enabling the identification of both retail and institutional investors in the ETF. This transparency facilitates a clearer understanding of market dynamics, as it becomes easier to see how Bitcoin is distributed among investors and how these holdings change over time, enhancing market insight and information flow.

The future of Bitcoin ETFs could mirror the traditional finance sector, where multiple passive funds track the same index like the S&P 500, suggesting that each major broker dealer might introduce their own Bitcoin ETF. While large fund management companies are likely to dominate due to better cost ratios, market access, and custody security, smaller companies might struggle to compete. The survival and selection of ETFs will likely hinge on cost competitiveness, leading to a price war similar to that seen with passive funds. Institutional investors will also consider the relationship with providers and the safety and custody solutions offered, although currently, most ETFs share similar legal structures and custody arrangements. The choice between ETFs may ultimately come down to minor differences in service providers and commercial strategies.

How will the market adapt when ETFs, which track the value of Bitcoin, face increased demand but cannot mine additional Bitcoin due to its hard-coded limited supply?

Unlike traditional assets like stocks or gold, where supply can adjust to demand through issuance or increased mining, Bitcoin's supply is capped at 21 million units, making it inherently scarce. In the case of Bitcoin, price is the only elastic variable. It suggests that price adjustment is the primary mechanism to reconcile fixed supply with fluctuating demand. 

So where does the price go from here?

Currently there are polarized views on Bitcoin's value and its potential as an investment asset. Some believe Bitcoin will go to zero, while others believe it can go up to $1 million dollars per bitcoin or higher. The market's future direction is uncertain and highly dependent on collective belief in Bitcoin's legitimacy and utility as a store of value and medium of exchange. 

Some other achievements by Bitcoin in the month of Jan 2024. 

• Bitcoin ETF surpassed silver to become the second largest ETF commodity in the US. 
• BlackRock's spot BTC ETF became the first to cross $2B in assets under management.
• Bitwise Bitcoin ETF (BITB) becomes the first U.S. bitcoin ETF to publish the bitcoin addresses of its holdings. Now anyone can verify BITB's holdings and flows directly on the blockchain.
• Ego death capital raised $100 million to invest in the bitcoin ecosystem. Their Fund I had raised $25.2 million in 2021 that made strategic investments in companies like Fedi, Breez, Synota, Relai, and Wolf.

Ethereum update

​​Here's a summary of the key events for Ethereum in January 2024: 

Price Update

Ethereum faced a significant market correction on January 3rd, with a 14% drop in price from $2,380 to $2,050 within a two-hour span. This correction erased a month’s worth of gains and liquidated $100 million worth of long-term contracts. 

However it reached $2,500 after the SEC approved the Spot Bitcoin ETF. Analysts anticipated a potential 50% surge, eyeing a target of $3,004, buoyed by the implementation of EIP-4844 and the Dencun upgrade. 

Staking Update

According to IntoTheBlock, January 2024 witnessed the highest ETH staking rate with about 29,128,513.51 ETH staked and a staking participation rate of 24.29%. 

EIP Ethereum Improvement Proposals to look forward to in 2024

There are several Ethereum Improvement Proposals (EIPs) to look forward to in 2024, focusing on enhancing the network’s scalability, security, and efficiency. Notable EIPs include EIP-4844 (Proto-Danksharding), which aims to reduce the cost of data availability across all layer-2s slashing rollups gas fees by up to 100x. EIP-1153 (transient storage opcodes), which aims to reduce gas costs by enabling temporary storage during contract execution, and EIP-4788 (Beacon block root commits), which proposes integrating a Beacon Block Root into each EVM block to improve information accuracy and reduce reliance on external oracles​. 

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

And finally let’s look at the top 5 DeFi/NFT protocols/ecosystems with the most fees generated over 30 days, which generally translates to the most active protocols. In some cases, the protocols take a % of the fee as revenues (eg. Lido Finance) in other cases its distributed almost entirely to the Liquidity Providers Stakeholders (eg. Uniswap Liquidity Providers) hence their revenue varies based on such parameters. 

Here are the top 5 protocols for the month of January in terms of Fees generated:

Image by Coinchange, data sourced from Token Terminal

1. Lido Finance is at the top of the list, generating the highest fees of $71.80 million. Expenses are relatively low at $5.12 million, and token incentives are at $1.53 million. Their earnings stand at $2.06 million.

2. Uniswap is second with fees amounting to $54.15 million. Their revenue is $0.00, and they have negative earnings of -$16.75 million. 

3. MakerDAO ranks third with $19.47 million in fees and an equal amount in revenue, as all fees are recognized as revenue. They have a similar amount in expenses ($17.05 million), and no token incentives, leading to earnings of $2.42 million.

4. Aave is in fourth place, generating $16.03 million in fees and a slightly higher revenue of $16.64 million. Their expenses are $118.38k, resulting in earnings of $2.52 million.

5. GMX is fifth, with fees of $11.66 million, revenue of $3.19 million, and token incentives amounting to $4.03 million. They have a negative earnings figure of -$840.33k, resulting in earnings of -$840.33 k. 

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