DeFi Research News May 2023

DeFi TVL Updates

Key DeFi Stats for May:

In May, the TVL stayed relatively stable in dollars terms around $48 Billion for the whole DeFi market. DEX 30day volumes have slightly improved in dollars terms from March’s $128B, to $67B in April to now $73B in May. Stablecoin marketcap stayed flat at $130B with top two USDT ($83B) and USDC ($29B) accounting for more than 85% of the total marketcap.

Lido Finance is continuing to hold the top spot after snatching it in January from the long-term king of TVL, MakerDAO. Its TVL stands at an impressive ~$13B up $3B from March and up $1B from April. MakerDAO holds the second place with a stable ~$7B TVL, followed by AAVE and Curve with ~$5.3B and ~$4.4B TVL for the 3rd and 4th place. Finally Uniswap maintained its #5 for 2nd month in a row with ~$4B in TVL. Overall, the top 5 ranking hasn’t changed since April. 

Macro View

The State Of The US Economy

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Domestic liquidity has been doing the cha-cha, moving sideways as the Treasury, in its own version of 'Robin Hood', has been shifting funds from its Treasury General Account into the big ol' financial system (which, by the way, is positive for liquidity) all the while balancing out the Federal Reserve's penchant for quantitative tightening (which is negative for liquidity). As of late May 2023, the Treasury General Account balance stands at about 61.952 billion dollars indicating that the TGA is now almost empty. We are now heading towards a critical juncture. If the debt ceiling is raised, and the Treasury issues more bonds and further replenishes its Treasury General Account, then combined with the Fed's ongoing 'tightening' shenanigans, it could lead to a potentially concerning liquidity situation. However, it is important to note that the Federal Reserve is projected to significantly modify or completely stop shrinking its balance sheet by mid-2023​ which could alleviate some of these potential liquidity concerns. 

Regulations Update

Coinchange CEO Maxim Galash wrote an opinion piece on Market Watch regarding Crypto Regulations 

Our fearless CEO Maxim Galash, wrote an opinion piece for Market Watch on May 22nd titled: The government is making a big mistake with how it regulates bitcoin and other crypto. The article emphasizes the crypto community's disappointment over the SEC's decision not to establish specific regulations for cryptocurrencies. Maxim argues that the SEC's tendency to regulate through enforcement actions rather than clear legislation is causing confusion and uncertainty. This change in regulatory stance, from approving Coinbase's IPO in 2021 to threatening action for alleged violations in 2023, is forcing some crypto firms to consider operating in jurisdictions with clearer regulations, like Dubai and Singapore. The lack of specific regulations, especially in DeFi, is seen as a threat to innovation and could lead to inconsistencies, less protection for consumers, and potential legal liabilities for unknowing participants. Maxim urges U.S. regulators to adopt a proactive approach, following the lead of regions like the EU, U.K., and UAE in establishing clear crypto regulatory frameworks. Failure to do so, he warns, could negatively impact the U.S.'s standing in the global crypto market.

SEC Seeks Dismissal of Coinbase's Mandamus Petition as Chamber of Commerce Backs Coinbase's Call for Clarity

The U.S. Securities and Exchange Commission (SEC) has filed a motion to dismiss Coinbase's petition requesting that the SEC provide clarity for the crypto industry. The SEC cited the complexity of Coinbase's proposal and the novel issues raised by crypto asset regulation as reasons for dismissal. Despite its claim of limited resources, the SEC executed a 9% increase in total enforcement actions in 2022.

Meanwhile, the U.S. Chamber of Commerce, representing nearly three million businesses, submitted an amicus brief in support of Coinbase. The Chamber stressed the economic damage and lack of due process resulting from the SEC's reluctance to provide clear guidelines for digital assets. 

Coinbase replied to this in the Third Circuit Court of Appeals to the Securities and Exchange Commission’s (SEC) arguments against its petition for a writ of mandamus. Coinbase has responded to the SEC, presenting three main points: Firstly, the SEC's enforcement actions are not sufficient replacements for the standard regulatory process required by the Administrative Procedure Act. Secondly, Coinbase argues that the SEC's threat of a lawsuit for alleged non-compliance is a direct dismissal of their rulemaking petition. Lastly, Coinbase notes the SEC's history of inaction regarding digital asset rulemaking petitions since 2017, suggesting that their own petition is likely to receive the same treatment.

EU Establishes First Comprehensive Crypto Licensing Regime MiCA

The European Union (EU) has unanimously adopted the Markets in Crypto Assets (MiCA) regulation, making it the first major jurisdiction globally to establish a comprehensive crypto licensing regime. The MiCA regulation aims to create a uniform regulatory framework for centralized crypto exchanges and to promote innovation while ensuring consumer and investor protection.

However, concerns have arisen around the regulation of transactions involving self-hosted wallets. Under the new legislation, transactions over €1000 involving centrally managed wallets will be regulated, but peer-to-peer transfers via unhosted wallets will not. Furthermore, the legislation grants substantial power to the European Securities and Markets Authority (ESMA), leading to concerns about potential centralization in a typically decentralized market. These complexities highlight the need for continuous scrutiny and refinement in the rapidly changing crypto industry.

BIS Paper Outlines Policy Measures and Potential Approaches to Address Risks in DeFi Sector

On May 17th, the Bank for International Settlements (BIS) has released a paper that gives an overview of financial policy measures related to cryptocurrency activities in 19 jurisdictions. The paper addresses policy measures in three key categories: centrally managed crypto assets, community-managed crypto assets, and users' direct exposure to decentralized finance (DeFi). The paper identifies four main risks of DeFi: illicit activity, legal uncertainty from smart contracts, risk to traditional finance, and power concentration. It proposes policy measures to address these risks, such as subjecting miners and validators to oversight, developing a process for issuing credentials to DeFi participants, approving fit DeFi protocols, and establishing public-private collaboration for code regulation.

The SEC Removes "Digital Assets" from the Final Regulation Obligating Hedge Funds to Make Disclosures

Earlier this month, the SEC withdrew its initial plan to include a formal definition of "digital assets" in its new rule that requires event reporting for large hedge fund and private equity fund advisers. The proposed definition, jointly prepared with the CFTC, described digital assets as any assets issued or transferred using blockchain or distributed ledger technology. The goal was to gauge hedge funds' exposure to digital assets better, assisting the SEC and the Financial Stability Oversight Council in assessing potential systemic risks. The rule also required large advisers to report their total digital asset exposure. 

However, the final rule removed all references to "digital assets," and they no longer form part of the reporting requirements. This move suggests the SEC and its staff are still considering the term and are not ready to incorporate it into the rule. The exclusion of digital assets may alleviate the reporting load, but the initial inclusion was a progressive move toward clarity about the SEC's stance on digital assets, which could guide future regulations and enforcement actions. However, without clear definitions, the SEC can execute enforcement actions at its discretion.

Bipartisan Momentum for Regulatory Clarity in Digital Assets: An Analysis of the Joint Congressional Hearing

On May 12th, a joint hearing titled "The Future of Digital Assets: Measuring the Regulatory Gaps in the Digital Asset Markets" was conducted by the House Financial Services Subcommittee on Digital Assets, Financial Technology and Inclusion (HFSCDA), and the House Agriculture Subcommittee on Commodity Markets, Digital Assets, and Rural Development (HASC). The hearing centered on the way forward for digital asset legislation, with bipartisan support for creating a clear regulatory framework. However, there were differing opinions on whether to create entirely new laws or amend existing ones, and the issue of regulatory authority between the SEC and CFTC was contentious.

Notably, there were suggestions that the CFTC should be the primary regulator, supported by both Rep. Caraveo and some witnesses. However, Former CFTC Chairman, Timothy Massad, suggested a joint rule development by the SEC and CFTC or the creation of a self-regulatory organization. Despite disagreements, the hearing is a positive sign of growing momentum towards establishing a solid regulatory framework for digital assets. The future success of the legislation will likely depend on achieving consensus on its content and the delineation of regulatory authority.

Potential Impact of New York's Proposed CRPTO Act on the Crypto Industry

New York Attorney General Letitia James has proposed the Crypto Regulation, Protection, Transparency, and Oversight (CRPTO) Act to protect consumers from cryptocurrency fraud. The Act contains provisions like mandatory disclosure requirements and obligations for exchanges to cover consumer losses. However, the Act could potentially burden the industry due to the complexity of compliance. The applicability of the Act to decentralized finance (DeFi) protocols is unclear. Furthermore, requirements like publishing audited financial statements and covering consumer losses are considered excessive, given the current stage of the crypto industry and the immature state of the crypto insurance market.

The Security Clarity Act

House Majority Whip Tom Emmer and Representative Darren Soto introduced the Security Clarity Act to clarify regulations concerning cryptocurrencies and establish clear jurisdictional boundaries for regulators. The Act includes the definition of "investment contract assets", which could be tangible, intangible, or digital assets sold or transferred under an investment contract. The Act suggests that while the sale of such an asset could be seen as a security, the asset itself isn't inherently a security. The introduction of this bill is lauded as it could provide the much-needed regulatory clarity in the crypto industry that the SEC has overlooked.

Institutional Update

Global ETF Survey 2023 Results

On May 22nd, Trackinsight SAS published a Global ETF Survey 2023 Results in conjunction with JP Morgan and State Street, with detailed analysis of how over 500 professional investors and fund selectors use ETFs. According to the survey, exposure to cryptocurrencies is still not commonplace among participants, with over three-quarters revealing no such involvement. Nevertheless, this year's survey highlighted a significant interest in both singular and diversified cryptocurrency products, including in the US where direct exchange-traded products (ETPs) linked to cryptocurrencies are not yet permitted. Moving forward, the application of ETPs might simplify the process by removing the need for wallet management, potentially making entry to this market substantially easier.

Family offices turn to crypto

Ocorian, a global service provider to high net worth individuals and family offices, has conducted new research indicating a significant trend of family offices incorporating cryptocurrency and other digital assets into their investment strategies. In a study involving over 130 family office professionals responsible for $62.425 billion assets under management, 90% reported their clients are seeking to include such assets in their portfolios.

However, investing in cryptocurrencies comes with challenges, including high risk, regulatory difficulties, global tax inconsistencies, and practical concerns. Most importantly, 80% of these family offices and high net worth individuals are finding it hard to find third-party support for managing the regulatory and reporting obligations associated with digital assets. Looks like they have yet to come across Coinchange!

Deutsche Digital Assets Launches Physically Backed Multi-Asset Crypto ETP on German Exchange

Deutsche Digital Assets has announced the launch of its first multi-asset tradeable product, the DDA Crypto Select 10 ETP, with significant participants including Jane Street, Flow Traders, DRW Europe, Bluefin Europe, and Goldenberg Hehmeyer. Scheduled to be listed on Deutsche Börse Xetra in the coming weeks, the ETP will track the market cap-weighted crypto index by MarketVector, launched on May 15, 2023. The assets of the ETP will be held in Aplo’s institutional-grade custody solution. The ETP predominantly includes Bitcoin (61.99%), Ethereum (26.48%), Binance Coin (5.84%), and Cardano (1.5%), with the remainder consisting of Polygon, Solana, TRON, Litecoin, and Polkadot, each accounting for less than 1%. The ETP holdings will be rebalanced quarterly with a total expense ratio of 1.69%, providing investors with an authentic exposure to the crypto market.

Capital Raises

Bitcoin-linked financial services startup River Financial reportedly raised $35M in a Series B round led by Kingsway Capital. The fundraise was led by Kingsway Capital, with billionaire investor Peter Thiel, Cygni, Goldcrest and Valor Equity Partners all participating

HashKey Group, one of the two licensed exchanges in Hong Kong, is aiming to raise up to $200 million in funding, targeting a valuation of $1 billion.

Dispersion Capital has unveiled a $40 million fund targeting pre-seed and seed investments in Web3 infrastructure initiatives, with limited partners such as the venture capital division of Circle, Ripple, and the Web3 infrastructure behemoth, Alchemy.

Other Noteworthy News/Events in May

Tether to Further Strengthen Reserves Through Purchase of Bitcoin 

On May 17th, Tether International Limited, the firm behind the first and most used stablecoin, is planning to bolster its reserves by regularly investing up to 15% of its net realized operating profits into Bitcoin (BTC). Adhering to the principle "Not your keys, not your bitcoin", Tether holds the private keys of all its Bitcoin holdings, which already amounted to about $1.5 billion as of March 2023. The company's strategy focuses on tangible gains from operations, excluding unrealized capital gains from price increases. This conservative approach aims to enhance transparency and offer a clearer understanding of the company's performance and capital allocation strategy.

China Accelerates Web 3.0 Adoption

Yes we are surprised too! But here it is: China Central Television (CCTV), the state broadcasting corporation, covered the topic of cryptocurrency adoption in Hong Kong on May 23. The broadcast stated that Hong Kong's regulators are now ready to allow trading of virtual assets in the special administrative region and are poised to take applications from virtual asset trading platforms. CZ tweeted “It's a big deal. The Chinese speaking communities are buzzing. Historically, coverages like these led to bull runs.” 

In other news, Beijing, the capital city of China, has reportedly published a white paper, the "Web3 Innovation and Development White Paper (2023)", aiming to bolster the web3 industry, viewing it as an inevitable trend for future internet development. The Beijing Municipal Science & Technology Commission released the document at the Zhongguancun Forum, expressing intentions to establish Beijing as a global digital economy innovation hub. To support this ambition, the city's Chaoyang district is committing to spend at least 100 million yuan (about $14 million) annually until 2025, as announced by Yang Hongfu, director of the Zhongguancun Chaoyang Park management committee. The white paper stresses Beijing's commitment to enhancing policy support and expediting technological advancements to foster the web3 industry.

Worldcoin launches app

Worldcoin founders, introduced the World App, a simple and easy-to-use wallet designed for the Worldcoin ecosystem. The App allows users to authenticate with World ID, proving they're human online, receive Worldcoin tokens, send digital money to any contact, and explore different cryptocurrencies. Furthermore, it offers gas-free transactions, verified contact transfers, and priority 24/7 chat support for users. Importantly, the app doesn’t require personal info, supports most smartphones, is in the process of being open-sourced, and is self-custodial.

The World App utilizes account abstraction via SAFE contracts for increased security and simplicity, with peer-to-peer payments supporting ENS usernames for easier ERC-20 transfers. It allows token trading through Uniswap and frictionless deposits and withdrawals via licensed partners like Ramp and MoonPay. Current beta is running on Polygon with plans to migrate to Optimism

The App uses Proof of Personhood, allowing for features like gas-free transactions, secure transfers to verified users, access to educational courses, and priority customer support. Since its initial debut, 1.5 million people have joined the World App pre-release, with over 500,000 using it every month. The launch of Phase I of the World App marks its first global availability.

On-Chain Metrics & Data

Bitcoin Update

Statistics suggest Bitcoin adoption continues to grow.  According to data from Glassnode, the number of “whole-coiners” (Bitcoin wallet addresses holding 1 BTC or more) has surpassed the one million mark. However the price continues to chop around in an unclear range. Bitcoin’s volatility sank to multiyear lows recently per NYDIG’s Weekly Research. 

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Bitcoin Miami Conference

Coinchange recently attended the Bitcoin 2023 Conference in Miami, which is the largest bitcoin conference in the world. However, the crowd was a tad more exclusive, with roughly 15k registered attendees, which was quite the slimming down from the previous year's attendee count, bustling at around 30k+ people. Nonetheless, it was an event where political candidates, including those from both major parties in the U.S. (Democrats and Republicans), spoke on the main stage and two of them utilized this opportunity to raise campaign funds through the Lightning network! The Lightning network allows for fast and scalable transactions between participating nodes. Here, it was used as a digital platform for campaign fundraising. The candidates showed a QR code on a screen during their presentations, and audience members could scan this code with their mobile Lightning wallets to immediately transfer funds. 

Jason Maeir (politically left candidate) published his new book, “A Progressive’s Case for Bitcoin” (that’s Progressive’s and not Progressive) outlining his perspective on Bitcoin as an important and ethical technology.  

In the previous DeFi Research News, we discussed Ordinals (NFTs on Bitcoin Network) and other programmability features that are being added lately. At the conference a team of developers introduced Ark, an emerging second-layer network, which calls for a soft fork pertaining to covenants in order to maximize its capabilities. While there are certain advantages and disadvantages when comparing Ark to the Lightning network, it is noteworthy that Ark can interact seamlessly with the Lightning network. Looking forward, there is the possibility of other future soft forks that could potentially incorporate zk rollups and various other scaling techniques to the main layer-1.

Ethereum update

Ethereum Network Suffers Finality Issues

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Earlier this month, Ethereum blockchain faced a technical issue that caused its network to stop finalizing blocks for over an hour. There were two such occurrence within two days. Finality, which usually takes about 15 minutes, ensures that a block can't be changed or removed from the blockchain without burning at least 33% of the total staked ETH. Despite Ethereum core developer Eric Conner's assertion that the network "did not go down" and that a bug causing the issue has been fixed, the problem of finality remains contentious. Even though transactions seem to process, the fact that they aren't finalized could result in potential reordering or ignoring of transactions. Despite these issues, end users were still able to conduct transactions on the network due to client diversity, as not all client implementations were affected by this scenario. Client diversity for network validators is very important, as a greater diversity contributes to a more robust and secure network.

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 May in terms of Fees generated:

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Lido and Uniswap continue to occupy #1 and #2 spots. GMX and Opensea lost their #3 and #4 position and were replaced by Convex Finance and Aave respectively. Finally at #5 Pancakeswap generated a total of $7.2m. 

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