DeFi Research News March 2023

DeFi TVL Updates

Key DeFi Stats for February:

March was quite stable while having a sharp dip and recovery in the middle of the month for DeFi Total Value Locked (TVL). We started the month at ~$49.6B and ended at the same level at the end of the month. Ethereum chain is still holding the fort with ~59% of the total TVL whereas runner-ups Tron and Binance chain held ~10% each, same as last month. The activity in the DeFi ecosystem witnessed a surge, causing DEX volume to increase to ~$128B over the past 30 days, an 137% increase since February, close to the volume seen in April and May last year. Lido Finance is continuing to hold the top spot after snatching it in January from the long-term king of TVL, MakerDAO. Lido previously held the top spot until June 2022, and today its TVL stands at an impressive ~$10.8B. MakerDAO is holding the second place with a stable ~$7.6B TVL, followed by AAVE and Curve which have distanced themselves since February with ~$5.5B and ~$4.6B TVL for the 3rd and 4th place. Finally Convex Finance gave its #5 spot to Uniswap with ~$3.9B in TVL.

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Macro View

The State Of Inflation

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The financial markets are still in this range we keep referring to since November last year. Some areas of the economy have come under pressure like the banking sector and maybe real estate in the coming future, while we are still in a crummy economic cycle. And because of that QT had to be stopped and QE had to start again at a record pace especially because of the Fed special program to ease the liquidity crunch on banks. It is unsure if this special program will have a medium to long-term effect on the inflation coming forward, keep an eye on this section of the blog to be in the know. All in all, Inflation is decreasing but not as fast as market participants have hoped for reports shows, hence all are riveted on the next CPI number announcement on April 12th. 

Global Update

From the US banking crisis to BRICS countries soon to expand while China and other key countries push the de-dollarization of trade, March was quite eventful. Let's dive in. 

US banking crisis?: 

This trigger of events could be attributed to $USDC de-pegging, which in turn led to more de-pegging as market participants feared that Circle cash reserves at SVB would just vanish after going into bankruptcy. Other banks followed suit like Signature Bank, First Republic Bank, and Silvergate went bankrupt or were just outright halted by authorities to prevent further damage to their depositors and the market. The Fed quickly resorted to yet another “extraordinary measure” called Fed’s Bank Term Funding Program (BTFP) built together with the US Congress to backstop the losses and ease the situation with a $25B package on March 13. A couple of days later, the usage of the Fed’s BTFP rose close to $200 billion already. A JPM strategist estimates that it could even reach $2 trillion, making it the par amount of all bonds held by US banks excluding the top 5 which can’t subscribe to the BTFP. This new program is somewhat a variation of the already existing discount window borrowing put in place in ‘03 by the Fed. Its utilization also picked past above the ‘08 levels at a record $115 billion dollars on top of the BTFP.

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BRICS countries looking to expand:

With more than a dozen countries expressing interest in joining the BRICS bloc, with Saudi Arabia and Iran formally requesting integration, the current group of countries is set to increase its share of world GDP, which currently stands at ~33% (where China alone makes up 20% of world’s GDP). This is amidst the US's abusive usage of its reserve status which is pushing emerging countries, especially countries with dollar-denominated debt to seek refuge in other countries that might not impose their own currency. 

The other countries that expressed interest are Bahrain, Egypt, Algeria, and Argentina. There are also rumors that Mexico, Turkey, Indonesia, Vietnam, Pakistan, and the Philippines are thinking about entering the BRICS as well. 

China trade de-dollarization:

This leads Russia alongside China to push for a BRICS currency, which could be a multi-currency system made up of the participating countries’ currencies. Even former Goldman Sachs chief economist Jim O'Neill is calling on the BRICS bloc to expand and challenge the dominance of the U.S. dollar, especially toward emerging countries that suffer from U.S. dollar dominance. It is exemplified by the record gold purchases from related central banks as well as international trade being settled using local currencies rather than the usual US dollar. This was the case for the LNG trade settled using Yuan and the Shanghai Petroleum and Natural Gas Exchange. Then we saw Kenya expressing that it will use Kenyan shillings for its oil imports from UAE and Saudi Arabia, while at the same time, Saudi Arabia struck a record deal to accept Yuan for its oil export to China while also agreeing on building an oil refinery in China.   

Regulations Update

This month, we keep the focus of this section on Operation Chokepoint 2.0 underway in an attempt to shed light on it and bring market participants to fight back at their individual scale. If you’re not living and breathing crypto, you might not have heard about it specifically but it must ring a bell in regard to similar events that happened in ‘13 under the Obama administration. Essentially, Choke Point was a scheme that sought to marginalize specific industries operating legally — not through lawmaking, but by applying pressure via the banking sector. It encompassed sectors such as: payday lenders, firearms manufacturing, and adult entertainment amongst others. The Trump administration, fortunately, ended this scheme, but the Biden administration just reversed everything that was done and picked up from where the Obama administration left off and is now targeting the crypto industry. All the evidence is here to see in plain sight. Operation Chokepoint 2.0 use a “ruling by blog post” scheme where regulators will regulate and “force” bank to shut or inhibit their crypto business based on vague policy and statements shared in “blogpost”. Banks need clarity and a stable environment to strive, such a scheme does the complete opposite. 

Then came the bank run that we mentioned above, which we can argue was triggered by Operation Chokepoint 2.0 in the first place, while the regulators and Congress rejoiced at first, they quickly reverted their stance and started the BTFP since the contagion and fear were spreading quicker in the digital era that they hoped for. Now the U.S. economy has inflation likely going back up, meaning that the Fed might be further increasing rates in its next announcement in May, if not sooner. 

The rest of the regulatory section is packed! With all the recent regulatory actions hitting the crypto industry like a train at full speed. But hey, at least we can all agree that this is one soap opera that no crypto person wants to miss, right? Here’s the TL;DR: 

• SBF charged by Federal prosecutors with funneling $40m in crypto to bribe CCP Officials
  
  
• Binance and Its CEO Sued by CFTC Over US Regulatory Violations
  
  
• EU parliament passes legislation on digital wallet making use of zero-knowledge proofs to secure users private information.
  
  
• Sushiswap gets served a subpoena by the SEC, “Sushi Chef” seeking 3 million USDT to fund the legal defense from SushiDAO
  
  
• The OCC let crypto bank Protego’s application for a national trust charter expire without approval.
  
  
• The SEC sent Coinbase a Wells Notice, indicating its intent to bring enforcement actions against them for a variety of their business lines.
  
  
• The NY Attorney General declared Ethereum, the second-largest crypto asset, a security.
  
  
• The Biden admin proposed a bill that singles out crypto miners for onerous tax treatment and also wants to implement an excise tax on electric consumption

FedNow announced during bank crash - upcoming CBDC?

FedNow is poised to launch in July as per the Federal Reserve Announcement on March 15. Jerome Powell in a recent hearing in front of Congress explained that FedNow and CBDCs are different in many ways. He explains that it is years away from being launched. Last year congress has a 12-week pilot to test some architecture and systems that would make a US CBDC work. To some, Fednow is essentially the US CBDC that all have been speculating would come sooner than later. CT is touting that in the era of FedNow, bank runs, and boom/bust will happen even faster, some, as reported by Cointelegraph, are even drawing comparisons of Silvergate’s SEN and Signature Bank’s SigNet and asking where it will lead the US banking industry if those two company went bankrupt.  

Excise tax on electricity consumed by Bitcoin miner + Carbon credit accounting potentially impacting Bitcoin

Biden administration wants to pass a 30% crypto electricity tax as part of its 2023 budget blueprint for Fiscal Year 2024. If the budget becomes law, a 30% tax will be phased in over three years. The proposal aims to address the growing concern about the environmental impact of cryptocurrency mining, especially Proof of Work systems like Bitcoin more so than the “ESG friendly” Proof of Stake networks. James Broughel at Forbes digital assets did a very lucid piece on the subject with the pros and cons of energy consumption by the cryptocurrency sector.

Related to bashing up the cryptocurrency, especially the PoW network, the Financial Times' next bombshell article on crypto and how to stop doing more harm to the environment got exposed by Pierre Rochard in an article in Bitcoin Magazine. The TLDR: the Financial Times wanted to publish an article about carbon credit accounting that would penalize the Bitcoin network since it would not only count the direct emissions but also indirect emissions of carbon via its “fractional reserve indirect carbon accounting” (FRICA), likely rebranding as “marginal indirect carbon accounting” to make it more palatable.

Uniform Commercial Code (UCC) revision pushed for Bitcoin and crypto adoption in commerce, while being misunderstood by the Bitcoin community

Over the course of a three-year, collaborative process that was open to the public, the Uniform Law Commission (ULC) and the American Law Institute (ALI) undertook a project to revise the Uniform Commercial Code (UCC) to account for the impact of emerging technologies on commercial transactions. There has been a recent uproar in the crypto community about its bad impact on the sector since it would “ban” cryptocurrency or otherwise advantage central bank digital currencies and disadvantage cryptocurrencies use cases in commerce since atop of the definition of “money” it integrates a new concept of Controllable Electronics Record - CERs (i.e Bitcoin). This uproar appears to stem from a lack of understanding and misconception about the revision proposed and its impact on the crypto sector. 

Actually it might well be the reverse of what the critics are saying, it's potentially the best piece of regulation that came in a long time ago, especially right after all the secured lenders' bankruptcies in 2022.

Indeed, the revision enshrines Bitcoin core tenets into the code nationwide (not your keys, not your coins), by providing certainty around collateralized lending and certainty as to the legal meaning of transactions of digital assets. It also amended how to establish proper “control” or “ownership” of those CERs and iterates that on this basis further financial transactions can take place with other parties or institutions. Here is another good summary of the changes and their impact.   

Coinbase receives a Wells Notice from the SEC - FUD in the air

This is another example that the Biden administration is against crypto, full stop. Enforcement by action, or sometimes by “blog post” (see above) is bad for U.S. innovation in general.
Coinbase registered their staking basis in 2021 in their filings to become a public company. Last year they proactively reached out to the SEC to register this part of their business with the SEC. This has been ongoing for close to a year now and during this time, Coinbase spent millions of dollars to propose two registration models, but the SEC never provided feedback or comments. Now Coinbase gets served a Wells notice, and we should not be surprised when CB was actually waiting for SEC's feedback. Picture this: It's like watching a little child who refuses to eat her veggies, even though they're crucial for her growth. But here's the kicker: while she's busy throwing a tantrum, the other kids on the block like EU, China, and Asia are happily digging into her lunch and dinner, leaving her with nothing but tears to cry over her missed meal! 

Proposed custody rules that cut off institutions from crypto 

In our DeFi Research news for February, we shared with you the SEC announcement of a proposal to amend existing rules for Registered Investment Advisors. Registered Investment Advisors are required to have custody of the “securities and funds” they manage on behalf of their clients with “Qualified Custodians.”

We recently had an AMA with Morgen Rochard, she is an RIA, the founder of Origin Wealth Advisers, and a certified financial planner at Money Owners. She explained that this regulation is really just catching up with what proper RIA should have been doing since the beginning. Overall it is creating guidelines for RIA that were not implementing best practices. For the ones that did, it should not change the way they operate. 

Institutional Update

This month the institutional update does not have big names outside of crypto entering the space, although this does not mean current players are not making strides and pushing the crypto industry further. The most notable adoption is MercadoLibre adoption of Bitcoin and crypto payment on its MercadoPago wallet for all its users in Chile. 

• ConsenSys launched an institutional staking marketplace on MetaMask Institutional
  
  
• Fidelity crypto trading goes live
  
  
• Hong Kong allocates $50 million "to expedite" Bitcoin and crypto hub development
  
  
•  MercadoLibre, Latin America's largest e-commerce platform, has announced that it will enable bitcoin and cryptocurrency trading on its MercadoPago wallet app for its users in Chile.
  
  
• MicroStrategy buys more bitcoin below average cost price: Monday’s SEC filing shows the company purchased 6,455 BTC over the past several weeks.  They also fully paid off their BTC loan to Silvergate at a 22% discount
  
  
• Nasdaq's digital asset strategy was revealed. Nasdaq hopes to soon offer crypto custody solutions, which is the first of many steps on the exchange operator's roadmap for digital assets.

Other Noteworthy News/Events in March

Balaji Srinivasan taking a philosophical $1M bet that Bitcoin goes to $1M in 90 days

On March 20th, he tweeted about taking a $1M bet that Bitcoin reaches $1M in 90 days for the specific reasons highlighted in the section above in regards to bank failure and banking crisis. 

Although it can’t happen in such a short period of time as pointed out by Saifedean Ammous, it is true that this banking crisis has been going on since the pandemic started. 

Texas includes in its law that any citizen can hold Bitcoin and engage with Bitcoin-related activities freely

This passed proposal states that any individual developing on Bitcoin has to be protected equally to any citizen, and Bitcoin miners will never be inhibited from securing the Bitcoin blockchain while using Texas energy, bitcoin owners shall be protected from unreasonable seizure or searches. Furthermore, Texas citizens shall never be prevented from owning Bitcoin and enjoy the censorship resistance and sovereignty benefits it offers. It finished by welcoming any people involved in the Bitcoin community to  Texas as its law seeks to protect its citizens and foster growth for its local businesses.

On-Chain Metrics & Data

Bitcoin Update

Looking at the Bitcoin mempool now in April, we could infer that Ordinals’ launch in February was not just a fad and is still filling up blockspace and driving up the Tx fees, but is it really Ordinals that are driving the bulk of blockspace on the Bitcoin network? 

Let's find out what insight on chain analytics can uncover. 

First, let's look at inscriptions (the way Ordinals are created) from Ethereum to Bitcoin over time. 

We can see a correlation in February which remained high during the first half of March, then the correlation drastically decreased at the end of March. Do we then wonder to what this high mempool state should be attributed to if not for Ordinals? 

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We found a great thread from Timothy Peterson (@nsquaredcrypto) explaining that the mempool high state is primarily due to new and existing bitcoin investors “urgently” requiring block space to self custody their bitcoin, 68.18% of Bitcoin has been held and not moved for a year or more (up to 10y), an all-time high.
This makes sense, after what happened to the bank in the recent weeks and months. In times like this, we should have a fear and greed index for banks' solvency and stock market in general…. Oh wait there is one, on March 28th, TradFi is at 28 - Fear and Crypto market is at 59 - Greed. Coincidences? Don’t think so. 

He then shares his analysis of the reasoning behind the feedback loop of Market dump => Buyer steps in and frantically buys => Liquidity decreases and Mempool Increase => Transactions fees increase => Bitcoin scarcity kicks in => Price shoots up. 

The main reason is that supply inelasticity causes the demand curve to steepen leading to price elasticity of demand. The price not only increases but also “accelerates” the more demand increases. Where does this lead us? Probably higher as per his final tweet with a prediction of a top at $40,000 for the current movement.  

Ethereum Update

USDC Depeg

In the month of March we saw USDC de-peg amidst Circle exposure to Silicon Valley Bank of $3.3 billion dollars of its cash reserves out of $20 billion in total. All other stablecoins de-pegged during this event while all recovered shortly thereafter, USDC and USDC-related stablecoins dragged on almost a week and a half to go back to their peg. 

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On the other hand, ETH continues to be deflationary, currently at -0.120% annually. This is an incredibly bullish indicator for ETH to be deflationary even in a low-activity environment. We can see that during on-chain activity peak demand (Mar 11-15) the deflationary pressure increases dramatically.. With Coinbase releasing its rollup on Ethereum, the ecosystem is bound to benefit from the network effects of all Coinbase users. Price action-wise, it has been rather rocky from $1,500 to $1,800 end of the month. Meanwhile, the post-merge OFAC-compliant blocks have gone down from 66% in January to 47% in February and now to 31% in the past 30 days. This comes from the multiple MEV relayers that were launched to tackle this very issue.

A look at the top DeFi protocols based on the revenue 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 March:

Compared to the top 5 for the month of January: 

Four out of the top 5 protocols from January have continued to stay in the top 5 in March as well. However, Blur NFT Marketplace, which was fifth in February has been pushed down to 8th place by DYDX, Pancakeswap, and AAVE in 5th, 6th, and 7th place respectively.

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