DeFi Research News July 2022

In this edition of our monthly Research News Update, here are some of the high-level topics we will discuss: 

• USDT-to-USDC Market Cap Ratio Fell To Its Lowest Ever
• Update on EU Crypto Regulations
• CeFi Lender Voyager Went Bust
• Ethereum Merge Moved One Step Closer
• On-chain Bitcoin Metrics Indicating Bear Market Bottom

DeFi TVL(Total Value Locked)

At the beginning of July the DeFi TVL (the amount of user funds deposited in a DeFi protocol) was ~$88 Billion. In comparison, by the end of July it rose to ~$108 Billion,an increase of 22.7%. One might ask whether that means that we are out of the bear market, however it appears that even expert analysts can’t agree on that.   Let’s take a deeper look at the top 10 DeFi protocols that gained the most TVL in July.

Here is a chart from Token Terminal for the month of July where we can see that MakerDAO (the protocol that introduced world’s first decentralized stablecoin ‘DAI’) is leading the pack, and just behind MakerDAO is LIDO Finance,  the largest liquid ETH staking platform. It’s of no surprise that a stablecoin issuer is gaining the most market share of DeFi TVL as people generally exit the market or return to their safety zone in times of market volatility or turmoil.. When it comes to stablecoins, another metric to watch is the USDT to USDC Market Cap Ratio which leads us to our next segment. 

USDT-to-USDC Market Cap Ratio Fell To Its Lowest Ever

The USDT-to-USDC market cap ratio fell to its lowest recorded level in July 2022. The market capitalization of USDC has grown by 8.27% since May 2022 causing it to reach its highest  close of $56 billion this past July. On the other hand, USDT suffered an over 20% drop in its market capitalization, from it's all time high of around $83.2 billion in May to currently around $66 billion. 

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Since the unexpected collapse of Terra’s UST stablecoin, crypto investors have become cautious and are moving towards stablecoins that are fully backed. Tether has been challenged multiple times in the past regarding their lack of transparency around the reserves backing USDT, and this trend confirms that the investors are preferring to move towards the most transparent stablecoins. Coinchange continues to monitor the various stablecoins and only participates in the ones fully backed by reserves. 

Macro View

DeFi has been caught in the crossfire of both crypto-specific chaos and macroeconomic turbulence. Terra collapsed, the unwind of Three Arrows Capital triggered billions of dollars of forced selling, and rising interest rates sucked liquidity away from higher-risk assets like crypto. As a result, the average DeFi protocol experienced a major decline in market cap over the last few months. However, we are seeing some signs of bottoming in various markets. Gold is up 3.5% from its July lows, Nasdaq is up 18.24% over the past month and S&P is up 7.8% over the same period. 

Regulations and Institutional Update

The most recent update in the regulations is from the EU regulators. The EU agreement has two key components:

1. Transfer of Funds Regulation (TFR): The TFR establishes the monetary threshold above which cryptocurrency transactions are subject to the rule. Cryptocurrency businesses operating under an EU license, must capture information relating to the identity of the sender and recipient of a transfer of crypto assets for all transactions, regardless of their size. If a user transfers more than €1,000 between a cryptocurrency business and their own personal wallet, the business must ask the user if they are the owner of the wallet. If yes, then the user must verify their ownership of the wallet. This only needs to happen once
2. MiCA: Markets in Crypto Assets regulation, lays out the licensing regime for cryptocurrency businesses in the EU. Rules for stablecoin issuers, to be overseen by the European Banking Authority, will include a mandatory right of redemption, a physical presence in the EU, and reserve requirements that establish a minimum level of liquidity. Activities that may be captured by MiCA as forms of market abuse could include: 

Insider trading, Wash trading and Front running. MiCA calls on cryptocurrency businesses, most notably token issuers, to declare information on their environmental and climate impact.

Major News/Event in July

CeFi Lender Voyager Going Bust.

Voyager is a publicly listed company on the Toronto Stock Exchange that offers high yield on Crypto. However, since they had exposure to the now infamous Three Arrows Capital (“3AC”) that filed for bankruptcy, Voyager has started a voluntary restructuring process under Chapter 11. In their most recent update on July 11th, 2022, Voyager mentioned that the Customer USD is held in a special type of bank account called a For Benefit of Customers (“FBO”) account at Metropolitan Commercial Bank of New York (“MCB”). The amount of USD held in the FBO account is equal to the amount of USD in customer accounts. USD deposits will be available after a reconciliation and a fraud prevention process. They currently have about $1.3 billion of crypto assets on its platform, plus claims against 3AC of more than $650 million . 

Voyager’s users however might not receive their deposits entirely in the form of original assets. In their own words, they mention on their website that, “Under Voyager’s proposed reorganization plan that was presented on Friday, which is subject to change and requires Court approval, customers will receive a combination of the following, with the ability to select the proportion of crypto and common equity they receive, subject to certain maximum thresholds:

• Pro-rata share of crypto;
• Pro-rata share of proceeds from the 3AC recovery;
• Pro-rata share of common shares in the newly reorganized Company; and
• Pro-rata share of existing Voyager tokens.”

It remains to be seen whether their customers will actually get their crypto back or not.

Ethereum Merge Moves One Step Closer

Ethereum Mainnet is the primary public Ethereum production blockchain, where actual-value transactions occur on the distributed ledger. When we talk about ETH prices, we’re talking about the Mainnet ETH. However, in addition to the mainnet, there are three public testnets. These are networks used by protocol developers or smart contract developers to test both protocol upgrades as well as potential smart contracts in a production-like environment before deployment to Mainnet. link

In the near future, the current Ethereum Mainnet will merge with the Beacon Chain proof-of-stake system and will mark the end of proof-of-work for Ethereum. Such a change would have knock-on effects for ETH, since large amounts of ETH would need to be locked up (staked) for the network to function and the introduction of a fee-burning mechanism (EIP1559) will make ETH supply deflationary. Thus it is very crucial to have successful merges on the testnet before it is executed on the mainnet as billions of dollars are at stake on the mainnet.

On Jun 8, 2022,  Ethereum's longest-running testnet called Ropsten transitioned to proof-of-stake and about a month later on Jul 6, 2022, Ethereum testnet Sepolia moved over to proof of stake. Only one more testnet (Goerli) remains to be merged before they proceed with the mainnet merge. This merge has been promised by the developers for years but the process has suffered several delays, however, with two out of three testnets completing the merge, it looks like the ultimate merge might happen before the end of the year! Coinchange's research team is closely monitoring the merge in order to adapt its infrastructure and strategies to give the best possible yield on ETH. 

On-Chain Metrics & Data

Two most widely recognized on-chain metrics related to Bitcoin are the Realized Price, and its derivative the MVRV Ratio - both are explained below

Realized Price is the average price of the Bitcoin supply, valued at the day each coin last transacted on-chain. This is often considered the 'on-chain cost basis' of the market.

MVRV Ratio is the ratio between the market value (MV, spot price) and the Realized value (RV, realized price), allowing for a visualization of Bitcoin market cycles, and profitability.

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When spot prices trade below the realized price, the MVRV Ratio will trade below a value of 1. This signals that the average Bitcoin investor is holding coins below their on-chain cost basis, and is thus carrying an unrealized loss.

We can also look at the market based on how long investors have held their coins, and calculate an MVRV for each of the three following categories:

1. The aggregate market (orange) 
2. Short-Term Holders (pink) who have held coins less than 155-days
3. Long-Term Holders (blue) who have held coins for longer than 155-days

All three categories are currently holding coins below their cost basis, and all MVRV Ratios are below 1. Historically where all three categories have MVRV Ratios below 1, it often correlates with the lows of bear markets. But as always, Coinchange doesn’t participate in predicting the bottoms and tops. We design market neutral DeFi strategies that eliminate price volatility risks and continue earning safe yield for our customers. To learn more about how we manage price volatility, check out our article: How Coinchange Mitigates Risk in DeFi and to earn passive income on your crypto, sign up for a High Yield Account today!