DeFi Research News November 2022

November might have been the worst month for crypto ever, if not it missed by a small margin. We covered the FTX/Alameda drama and how it doesn’t affect Coinchange in our in-depth blog post. Over the past month, the collapse of exchange giant FTX took center stage, and it might have been difficult to keep up with events in the greater crypto ecosystem. But Travis Kling from Ikigai Capital (who had to close his fund as his money is locked on FTX) put together a great list of noteworthy events in a tweet. So let’s dive into this edition of our monthly Research News Update. Here are the topics we discuss:

DeFi TVL Updates

Key DeFi Stats for November:

November saw a dramatic decrease in DeFi TVL in dollar terms, with a drop from ~$55B to ~$42B over the month. However, if looking at TVL in native currency (ETH), it held the 20M ETH mark the whole month with short lived ups and downs caused by FTX/Alameda blowing up.  Borrowing demand remained slow with slight increase, leading to stagnant interest rates across Money Market protocols. DEX volume saw a significant uptick at the beginning of the month which then decreased from nearly $15B USD weekly volume to $4B USD.  MakerDAO topped the list, but saw a decline in TVL to ~$6.7 Billion over the past 30 days. Lido Finance took the second spot with $6.2 Billion, followed by AAVE at $3.89 Billion and Curve at $3.7 Billion. Uniswap dropped to the number 5 spot with only $3.5 Billion. 

Macro View

State Of The Inflation

Recently, the macro environment has been in a state of stagnation, with varying data depending on which metric is examined.

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Black Friday weekend e-commerce sales were at record highs

China Lockdowns: 

Meanwhile China is currently having their third virus outbreak, and thus re-imposing significant lockdown measures in many cities. There is still no definite plan for when lockdowns and widespread testing will be over, which means that it is unlikely that life will go back to normal anytime soon. 

EU Natural Gas Update:

Europe was fortunate to experience an unseasonably warm autumn, which allowed them to fill their natural gas storage capacity; this, combined with large shutdowns of energy-intensive industry (also known as demand destruction), helped to ease the pressure on prices. Nevertheless, signs of a market bottom have been getting more and more visible as winter approaches. 

Regulations and Institutional Update

Circle Earns In-Principle Regulatory Approval in Singapore link

Circle, a cryptocurrency finance company, has received in-principle regulatory approval from the Monetary Authority of Singapore (MAS) to operate a digital payment token service. This approval makes Circle one of the very few companies in Singapore to receive such authorization from the MAS. The approval will enable Circle to offer its customers a secure and compliant platform to send, receive and store digital tokens. The move is also expected to create a more conducive environment for blockchain innovation in the country.

JP Morgan Polygon update for the future of Institutional DeFi tweet article

The Monetary Authority of Singapore (MAS) revealed that the completion of the first live trades under Project Guardian's industry pilot has successfully demonstrated the potential of DeFi applications in wholesale funding markets. In addition, more industry pilots have been initiated to examine the practicality of asset tokenization and DeFi in other facets of the financial industry. The first pilot included DBS Bank, JP Morgan, and SBI Digital Asset Holdings in a transaction involving liquidity pools made up of tokenized Singapore Government Securities Bonds, Japanese Government Bonds, JPY and SGD. Polygon was used as the public permissionless blockchain for the trade execution.

ECB executive share some insight on digital euro and possible Tx limit and saving caps: link 

Fabio Panetta, an executive board member of the European Central Bank (ECB), suggested at a conference hosted by the European Commission that the European Union's central bank digital currency (CBDC) might have restrictions on transactions and store-of-value for individuals.

NYC FED and digital dollar: link 

The New York Fed's innovation center is partnering with several major financial institutions such as Citigroup Inc C.N, HSBC Holdings Plc HSBA.L, Mastercard Inc MA.N and Wells Fargo & Co WFC.N to pilot a digital dollar system. The project, called the “regulated liability network”, will use simulated data to test how banks can use digital dollar tokens to speed up payments. Michelle Neal, head of the New York Fed's market's group, has said that the central bank digital dollar has the potential to speed up settlement time in currency markets.

Fidelity launch commission free trading on bitcoin and ether, but will apply a 100bps spread on orders: link

Fidelity Investments is thrilled to announce their upcoming commission-free bitcoin and ether trading services! Not to mention, Fidelity also provides an ether index fund to track performance in U.S dollars, as well as a metaverse ETF, and a crypto and digital payments ETF. Plus, in April, Fidelity gave employers the option to include bitcoin in their core 401(k) plans, making investing even easier! Though there is a 1% fee on each transaction, the benefits of this service far outweigh the cost.

Bitstamp register with Spain central bank: link

Bitstamp, the longest-running crypto exchange, has successfully secured its registration in Spain’s central bank. This registration requires the exchange to comply with anti-money laundering and counter-terrorist financing provisions, as well as national laws regarding crypto advertising from the National Securities Market Commission. Although the European Union’s framework on regulating crypto assets and crypto exchanges will not come into force until 2024 at the earliest, exchanges like Bitstamp are proactively seeking registration on a national level before then. Once the new laws are implemented, exchanges will benefit from “passporting” their registration, meaning that registration in one EU country will give access to the rest of the 27-state bloc.

Coinbase payment to be power by Truelayer in UK: link

Fintech unicorn TrueLayer is partnering with Coinbase to enable UK users to top up their accounts via their mobile banking app. This is part of a broader push into digital assets as the open-banking company eyes adding a stablecoin product to its crypto-focused offering. 

Summary of regulations and regulators coming on the back of crypto post FTX collapse:

1. Jamie Dimon declared that the SBF-FTX disaster, which had been in the making for a long time, could have been prevented by regulatory authorities.

2. Senior payment specialists at the European Central Bank (ECB) disregarded Bitcoin as a promotional stunt that should not be authorized by regulatory involvement.

3. President Vladimir Putin of Russia requested a blockchain-based settlement system that is open. Additionally, SBER BANK in RUSSIA merged Metamask with its blockchain platform.

4. Binance and Kraken were charged with contravening US sanctions on Iranian nationals and organizations.

5. Belgium has replied to affirm its view that Bitcoin and Ether, among other digital currencies, being issued solely with computer code, are not securities.

Other Noteworthy News/Events in November

Binance emerge to bid on voyager acquisition link

Binance emerged to bid on voyager acquisition since FTX is bankrupt leaving Voyager to re-open its proposal for acquisition. Binance.US, the American branch of the world’s biggest crypto exchange, is getting ready to offer for the insolvent lending platform Voyager Digital. After FTX declared bankruptcy in the second week of November, Voyager declared that it had reopened the process for its takeover.

Metamask privacy policy update sparks controversies; competitor Alchemy is doing the same thing and also allows advertisers to access users IP info. 

There were a lot of tweets around Metamask’s updated privacy policy mentioning that: Metamask’s default RPC provider Infura, will start TRACKING and associating your IP address to every transaction. Our Head of Research also tweeted that Alchemy, a competitor of Infura does the same or even worse, uses your IP Address to sell it to advertisers. Read the tweet here

Trouble ahead for Genesis Trading/ Gemini Earn/ DCG/ GBTC

This year, Genesis has endured major losses, starting with the Luna/Celsius/3AC debacle in the spring and continuing with the FTX disaster. As a result, they had to suspend their loan services, which also affected Gemini, one of the major crypto exchanges. The parent company of Genesis, DCG, borrowed money from the firm, and so now they are facing difficulties and attempting to raise funding in a difficult market. To solve the situation, DCG may sell its Grayscale business to another asset manager. An alternative solution would be to liquidate the Grayscale trusts, leading to the selling of a substantial amount of bitcoin and other cryptos, thus potentially causing a slump in prices, but also allowing shareholders to receive their NAV. It is uncommon for a closed-end fund or trust to persistently trade lower than 20% of its net asset value, however GBTC is trading at more than twice this discount.

On-Chain Metrics & Data

Bitcoin Update

Since mid November, Bitcoin has remained relatively stable around the $16,000 mark, fluctuating above and below, but without any evidence of either a price increase or decrease. However if we look at the NUPL (Net Unrealized Profit or Loss) indicator (blue line) in the chart below, it suggests that BTC is in the capitulation phase, considered to be a deep value territory. 

Source: Look into Bitcoin. 

Retail BTC users show increase on-chain

It is evident that an increase in small on-chain users has occurred due to the lesson many people have learned about counterparty risk. This is evidenced by reports of increased sales of hardware wallets and an upsurge of sign-ups for bitcoin-only companies that promote self-custody or shared custody. On-chain activity has also reflected this trend with a 400,000 increase in addresses holding one full bitcoin or more. Although one address does not indicate a single individual, it does indicate a rise in self-custody practices.

Outflow of BTC and ETH from exchange: link

Nansen, a blockchain intelligence platform, has reported that in a span of seven days, Gemini faced a total of $682 million in net outflows after the collapse of FTX. Gemini had also paused withdrawals from its Earn program on Wednesday, which caused other exchanges such as Binance, Coinbase and KuCoin to also have large drops in deposits, as per Nansen's data. To soothe the apprehensions among crypto users, several exchanges have decided to make their reserves public. Moreover, a number of prominent figures in the industry are advocating for regular verification of crypto holdings, along with the need for independent audits.

Ethereum Update

According to data from Etherscan, the amount of ETH burnt has spiked as much as 5,000 ETH in a day after FTX’s implosion triggered market jitters. Now the burn rate has slowed to around 1,250 ETH daily. This indicates that Ethereum had become deflationary around November 9th-12th as a result of the increased network usage, leading to large amounts of crypto being moved on-chain. However, by November 30th, the inflation rate had dropped to a negligible -0.00044%, suggesting that the amount of ETH being generated was almost equal to the amount being destroyed. This deflationary/inflationary flip was likely caused by a decrease in network activity, leading to decreased demand.

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 most fees generated over 30 days, which generally translates to 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 Providersstakeholders (eg. Uniswap Liquidity Providers). 

Ethereum ecosystem still sees the highest amount of activity with $86.6M fees generated, followed by Uniswap as the leading DeFi protocol with $50M fees generated. Lido Finance (ETH Liquid Staking Protocol), OpenSea (NFT Trading Platform) and BSC (Binance ecosystem) have generated $33M, $26M and $22M respectively over the same period. 

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