The State of Stablecoins in DeFi: A Deep Dive by DappRadar

https://thedefiant.substack.com/p/the-state-of-stablecoins-in-defi

Hello Defiers! Stablecoins have become the backbone of crypto, with volume, total market capitalization and growth outpacing coins of most blockchain networks.

DappRadar has produced a report on stable digital assets, published exclusively on The Defiant, to better understand the state of one of the most fundamental pieces of the crypto economy.


🎙Listen to this week’s podcast episode with Dan & Clinton of YAM:

📺 Check Out The Pilot Episode of The Defiant’s DeFi 101 Series!

DeFi 101 will serve as an introduction into decentralized finance, with 30 planned episodes. This is not intended to be the first episode of the series but rather a standalone episode to test the ground for the future of this series. So feel free provide feedback. The video was produced in partnership with Alp Gasimov, Robin Schmidt of Harmony Protocol and DeFi Tutorials with DeFi Dad.


🙌 Together with Zerion, a simple interface to access and use decentralized finance,  Perpetual Protocol, which provides decentralized perpetual contracts for any asset, and HackAtom V, a two-week virtual hackathon organized by Cosmos.


The Rise and Rise of Stablecoins in DeFi

By DappRadar

Stablecoins are one of the fastest-growing asset types in the crypto world. The purpose of these cryptocurrencies is to track a particular peg (usually the dollar) minimizing volatility and providing a convenient unit for transacting.

They have become the lifeblood of the DeFi ecosystem and may look to take over other sectors like remittance and gaming. While differing in implementation they look to avoid violent price fluctuations and enable users to transact in units more familiar to them from traditional finance. Stablecoins have become the bridge between traditional and crypto economies.

The different flavors of stability

Stablecoins currently account for over $18B in total market cap across different blockchains.

https://public.flourish.studio/visualisation/3828410/

There are two main types of stablecoins: custodial backed tokens and algorithmic coins. The first, true to their name, use a centrally stored reserve of fiat assets to guarantee the peg. The tokens are (in theory) backed 1:1 and as such should not deviate from it. The most popular of these are USDT, USDC, and now BUSD.

The algorithmic approach often also uses collateral (in the form of digital assets and not fiat), but unlike custodial backed tokens, it is operated and stabilized through smart contracts and algorithms. It uses economic incentives to motivate arbitrageurs to maintain the peg of the stablecoin. Dai is the most famous stablecoin in the market, but there are others like RSR, USDX and sUSD. These coins exhibit more volatility and at times struggle to maintain the peg. 

A third, but the more abstract type as the concept is still in an experimentation phase, is the CBDC or central bank digital currencies. Worried by the fact that DeFi constructs may displace central banks, governments are looking into issuing their own cryptocurrency assets. While some experiments like the Petro have proved largely unsuccessful, the expected arrival of the digital yuan and other major digital currencies has promise.

https://public.flourish.studio/visualisation/3861780/

The key difference between algorithmic coins and their counterparts is ownership and censorship. The setup for USDT and the like enables the custodial agents to freeze assets and even reverse transactions. While these custodial offerings may have simpler onboarding and their regulated status simplifies their adoption, they present a real contradiction to the decentralization ethos.

Using stablecoins

Stablecoins became a sort of digital cash and as such became useful during risk-off moments in the market, when users wanted to flee to safety but did not want to convert back to fiat. Additionally, leveraging strategies became popular with users.

However, with the near-collapse of MakerDAO in March, it became apparent that stablecoins can have a bigger role in the ecosystem. Their stability feature makes them an interesting diversification instrument, as well as a solid collateral asset.

Prior to the event, MakerDAO’s stablecoin was backed by volatile cryptocurrencies ETH and then BAT. However, these tokens were highly susceptible to market swings, and as March showed when left unbalanced exposed the system to too much risk. At this time, over 42% of Dai is minted from USDC, making it the most popular collateral asset on MakerDAO.

Altcoins are often highly correlated, and as such stablecoins offer a way to reduce risk in the collateral pool.

https://app.flourish.studio/visualisation/3816159/edit

However, with the DeFi yield farming boom stablecoins gained another major utility boost.

The first major governance token distribution utilizing yield farming was done by Compound. The decentralized loan application rewarded users for loaning and borrowing assets with a share of governance tokens (initially) based on the associated yields.

The stablecoins proved highly popular for farmers, and even with high-interest rates, the proposition was profitable. This was in part due to the fact that the underlying assets loaned and borrowed were stable. Once the attention turned to volatile tokens the community was forced to adjust the distribution strategy.

This yield farming strategy catalyzed stablecoin activity. As users utilized the composability of dapps to maximize farming yields multiple dapps became linked in farming transactions. Specifically, exchange stablecoins with minimal slippage became critical, which gave prominence to Curve.

https://app.flourish.studio/visualisation/3825577/edit

Not surprisingly, Curve whose TVL consists mostly of stablecoins suffered least from the price effect, and showed real growth, as opposed to inflation driven appreciation.

https://public.flourish.studio/visualisation/3828020/

Centralized vs Decentralized

While centralized stablecoins come with some baggage they have a much easier time navigating regulatory waters and getting in front of retail users.

As such, USDT and USDC have grown their presence in the DeFi space. For most of the summer, Ethereum was the only meaningful DeFi ecosystem and so the inflow of stablecoins was focused on this blockchain.

In part this can be seen through fees. For example, USDT has been one of the biggest generators of gas fees on the network.

This has made smaller transactions much more expensive. No surprise, the median size of the transaction has grown over the summer. These conditions are much more favorable to whales as they transact in large volumes but hurt retail users.

Charts

It is thus logical to see that the majority of trading activity using stablecoins occurs on centralized exchanges. Dai as a dapp product has been making headway, but even this stablecoin trades mostly on centralized platforms. High, hard to predict costs, impede the growth of the decentralized ecosystem.

High gas costs have also squeezed a lot of gaming activity from the network, and if the trend persists this will hamstring commercial activity. While cryptocurrencies are now accepted in more and more places, it would make no sense buying a coffee using cryptocurrency if the transaction cost surpassed the cost of the coffee itself.

Relying on the community

While centralized coins may have the current lead in volume, decentralized (algorithmic coins) generate more community engagement.

[the data is collected from https://app.santiment.net/]

Ethereum has created a blueprint for a DeFi ecosystem and one of its core components is a stablecoin generating MakerDAO. Its success as a catalyst of the DeFi sector has led to similar projects springing up on rival networks: Kava, Acala, JUST, and more. The algorithmic coin engages users as loaners, borrowers, arbitrageurs, and legislators. With the trend for governance coins and composability in full swing algorithmic coins make more sense, but it remains to be seen how regulators will respond to their continued growth.

It should also be noted that while algorithmic coins share a similar concept, they use different incentive mechanisms. What makes this particularly interesting is that the decentralized governance component enables the community to respond to market challenges and enact changes.

With traditional currencies, the market is forced to deal with policies passed without its direct involvement. In the case of DAO-based algorithmic stablecoins, the community (at least in theory) can have a direct impact on the policies that affect it. 

Looking forward

Stablecoins have become one of the top asset classes in the crypto industry. Their capitalization has surpassed notable Bitcoin forks like Litecoin and Dogecoin, remittance focused projects like XRP, and is gaining ground on Ethereum. The latter could eventually become a problem as it would undermine the incentive principles that support the security of the network.

https://public.flourish.studio/visualisation/3828429/

Still, stablecoins need to move outside of DeFi to gain acceptance as commercial mediums of exchange. For Ethereum, that means dealing with the fees issues and more broadly that entails integrating with retail-facing applications.

MakerDAO has already started the process with its gaming initiative. If Ethereum maintains its lead as the number one dapp network in the industry, MakerDAO should continue to expand its role as a key financial infrastructure project and Dai should see usage growth in the network.

Still, custodial coins should continue to maintain their dominance in the near to midterm future, as the regulated nature makes them a natural bridge with a centralized economy.


The Defiant is a daily newsletter focusing on decentralized finance, a new financial system that’s being built on top of open blockchains. The space is evolving at breakneck speed and revolutionizing tech and money. Sign up to learn more and keep up on the latest, most interesting developments. Subscribers get full access at $10/month or $100/year, while free signups get only part of the content.

About the founder: I’m Camila Russo, author of The Infinite Machine, the first book on the history of Ethereum. I was previously at Bloomberg News in New York, Madrid and Buenos Aires covering markets. I’ve extensively covered crypto and finance, and now I’m diving into DeFi, the intersection of the two.

Borrowers Pull USDC from MakerDAO, Switch to WBTC & ETH Instead

https://thedefiant.substack.com/p/borrowers-pull-usdc-from-makerdao

Hello Defiers! Here’s what’s happening in DeFi:

  • USDC collateral in MakerDAO collapses
  • DeversiFi launches Layer 2 Dex
  • Compound’s governance move
  • Buying ETH on Dharma
  • The “Coinbase Effect”

If you’re receiving this email, that means you’re a paid subscriber of The Defiant, (thank you!) You’re getting the full content of this newsletter, while free subscribers a…


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OMG Can Take USDT Transactions Off Chain. Bitfinex is a Great Start But it Needs More

https://thedefiant.substack.com/p/omg-can-take-usdt-transactions-off

Hello Defiers! Here’s what’s happening in DeFi:

  • OMG Network launches with USDT integration
  • Balancer starts issuing BAL tokens
  • mStable is the latest stablecoin protocol

and more.

If you’re receiving this email, that means you’re a paid subscriber of The Defiant, (thank you!) You’re getting the full content of this newsletter, while free subscribers are gettin…


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Winklevoss Twins Say Stablecoins Are Still Missing Their “Facebook Moment”

https://thedefiant.substack.com/p/winklevoss-twins-say-stablecoins

Hello Defiers! Earlier this week Tyler and Cameron Winklevoss, CEO and president of the Gemini exchange, respectively, sat to chat with The Defiant about everything from crypto in the pandemic, to Libra and stablecoins, to DeFi and their ETH holdings. The transcript and podcast link are below.

We all know the famous twins: Olympic athletes, their legal …


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Rather than Banning Stablecoins, Bankers Should Worry About Strengthening Their Own Currencies

https://thedefiant.substack.com/p/rather-than-banning-stablecoins-bankers

Hello Defiers! Here’s what’s going on in DeFi

  • Podcast with Loopring founder Daniel Wang released!

  • Bankers were just advised to tighten stablecoin regulation

  • DeFi Saver releases update to prevent another MakerDAO Black Thursday

and more:)

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🙌 Together with Ampleforth, a digital asset protocol for a base money which doesn’t require collateral and is uncorrelated with the rest of crypto.


The Defiant Podcast Episode 2: Don’t Trade Decentralized Money on Centralized Exchanges

Ever since Ethereum launched in 2015, there has been one over-arching concern hanging over developers’ heads: scalability. Loopring CEO and Founder Daniel Wang is using scaling solutions to build a protocol for non-custodial exchanges than can compete in throughput and cost with centralized exchanges. Is scaling on Ethereum solved? Listen up to what he has to say about that in The Defiant podcast’s second episode.


Bankers Advised to Tighten Stablecoin Regulations

The Financial Stability Board, which advises the G20 on vulnerabilities to the global financial system, yesterday published a document outlining 10 recommendations on how bankers should regulate stablecoins, which go from anti-money laundering sanctions to outright prohibiting these coins.

Takeways:

  • Stablecoin volume and use has become significant enough to prompt this document in the first place.

  • The best positioned stablecoins will be ones on the furthest end of the “decentralization spectrum”: Those that have gone to great lengths to comply with regulators, like USDC, and those that have minimized their reliance on third parties, like Dai.

  • Bankers should worry about making their local currencies and the global financial system more attractive to use than trying to ban digital assets.

Image source: fsb.org

Bankers are seeing potential in stablecoins

“The use of stablecoins as a means of payment or a store of value might significantly increase in the future, possibly across multiple jurisdictions,” the document said, even if it’s “currently contained.”

The Tether stablecoin is the third-largest cryptocurrency by market capitalization and the digital asset with the most trading volume, surpassing even bitcoin’s. Stablecoins are becoming enough of a threat that bankers are taking enough notice to consider draconian measures.

Stablecoins raise the following risks, according to the FSB:

If stablecoins are used as a store of value, variations in their value “might cause significant fluctuations in users’ wealth. Such wealth effects may be sizeable enough to affect spending decisions and economic activity.”

What about variations in government backed currencies? The reason why people might seek stablecoins in the first place is the erosion of value in their local currencies.

Large-scale flows of funds into or out of global stablecoins “could test the ability of the supporting infrastructure to handle high transaction volumes and the financing conditions of the wider financial system.”

The financial system currently handles trillions of dollars in transaction volume per day. Stablecoins would be just one more FX pair among the hundreds being transacted already.

“Macrofinancial risks may arise particularly if, over time, households and businesses in some economies (e.g. EMDEs) come to hold substantial portions of their wealth in GSCs [global stablecoins], rather than in local currencies. During periods of stress, households in some countries might come to regard GSCs as a safe store of value over existing fiat currencies and exacerbate destabilising capital flows.”

If people are choosing stablecoins as a store of value or means of exchange instead of their own local currencies, that’s probably because: fiat currencies are being devalued with reckless monetary/ fiscal policies, because governments are restricting access to other safe havens such the US dollar or gold, and because the global financial system is outdated, slow, expensive and cumbersome to use.

Currency Controls Don’t Work

Governments in developed nations looking to ban digital stablecoins is equivalent to authorities in emerging countries imposing currency controls when inflation and outflows spin out of control. It’s a patch solution, which historically hasn’t worked. People will find a way to protect their savings.

Wherever there are currency controls, there’s also a black market. The same would happen with stablecoins, except their digital nature makes circumventing regulation even easier.

Instead of looking to restrict or ban stablecoin use, authorities should be thinking about ways to strengthen their currencies or financial systems. But that would be naive to expect.

Decentralization Fixes This

In this context, the more a stablecoin depends on financial institutions to custody fiat currencies backing it and on centralized entities to issue, run and trade it, the easier it is to regulate and censor it. The more decentralized a stablecoin is, the harder it will be for countries to enforce regulatory actions on them. They could very well ban them, but the tools they have to make that ban effective will be reduced.

Authorities dictating what people can and can’t do with their money is exactly why a decentralized and open financial system is being built.

DeFi Saver Updates MakerDAO Collateral Automation

DeFi Saver, which provides an automated mechanism to manage collateral on MakerDAO, updated its system to prevent the events of Black Thursday ever happening again. The new version of the system, called Automation, can better react to MakerDAO price updates and supports “flash loans” to make sure loans maintain the right collateralization ratio.

Zerion Team Launches DeFi Market Cap

The team behind DeFi portfolio tracker and manger Zerion launched DeFi Market Cap, a website ranking the market capitalizations and other metrics specific to tokens of decentralized finance platforms. Total DeFi tokens’ market cap is at $1 billion.


The Defiant is a daily newsletter focusing on decentralized finance, a new financial system that’s being built on top of open blockchains. The space is evolving at breakneck speed and revolutionizing tech and money. Sign up to learn more and keep up on the latest, most interesting developments. Subscribers get full access at $10/month or $100/year, while free signups get only part of the content.

Subscribe now

Click here to pay with DAI.There’s a limited amount of OG Memberships at 70 Dai per annual subscription ($100/yr normal price).

About the author: I’m Camila Russo, a financial journalist writing a book on Ethereum with Harper Collins. (Pre-order The Infinite Machine here). I was previously at Bloomberg News in New York, Madrid and Buenos Aires covering markets. I’ve extensively covered crypto and finance, and now I’m diving into DeFi, the intersection of the two.

“If Anyone Were to Question the Utility of Ethereum – Simply Point Them to This Chart”

https://thedefiant.substack.com/p/if-anyone-were-to-question-the-utility

Hello Defiers! Lots going on in decentralized finance today:

  • The Flippening Series Part 2, with Ganesh Swami of Covalent: Complex Ethereum transactions on track to overtake simple transfers

  • MakerDAO makes radical governance move

  • Uma’s “priceless” token

  • Balancer Labs’ $3 million seed round

  • DeFi Saver’s MakerDAO auctions dashboard

  • Coinbase Wallet integrates De…


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Ren is Just Weeks Away From Bringing Bitcoin to DeFi, Says Loong Wang, the Project’s CTO

https://thedefiant.substack.com/p/ren-is-just-weeks-away-from-bringing

Hello Defiers! This week’s interview is with the CTO of Ren Project, one of the teams at the forefront in the effort to bridge different blockchains, and bring Bitcoin to decentralized finance in a trustless way. Loong Wang says RenVm is only a few weeks away from going live, and once it does, it will strengthen DeFi by adding different types of collate…


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Case for an Open Economy Strengthens as Pandemic Prompts Authorities to Tighten Grasp

https://thedefiant.substack.com/p/case-for-an-open-economy-strengthens

Hello Defiers! hope you’re having a great day. In today’s issue:

  • I explore how crises highlight how much power centralized institutions have over us, strengthening the case for a more decentralized future
  • Uniswap reveals V2 details, including flash swaps and improved price feeds
  • Dharma last week announced P2P payments
  • MakerDAO is close to raising enough Dai to heal bad debt

? Also, help me scale up The Defiant team by donating to my Gitcoin Grant! Just 1 Dai goes a long way 🙂

Subscribe now


Crises Strengthen Case for Decentralized Future

Extreme situations, such as the global pandemic we’re living in, highlight just how much control institutions have over individuals, and how they’ll use it when generalized fear erodes the usual checks and balances.

We’re not speculating about the power of central banks to print infinite amounts of money, they’re actually doing it. We don’t have to theorize about governments limiting personal liberties, they already are. We don’t have to imagine that corporations can censor their users, they’re cracking down.

By seeing these actions unfold, some may want to consider an alternative.

Photo by Robynne Hu on Unsplash

Governments Tighten Grasp

China is the clearest example of how governments will strengthen their grasp on their people in a crisis. Individual liberties, which are already limited in the authoritarian state, have been curtailed further with movement and travel bans, entire cities sealed off, and public transport shutting down. Authorities in the Hubei province, in an effort to identify and quarantine infected citizens, ordered pharmacies to report the name, address, and other personal details of people who bought fever and cough medicine.

But it’s not just China. The US government wants to have the ability to ask chief judges to detain people indefinitely without trial during emergencies, according to Politico. And while everyone’s distracted with the deadly virus, lawmakers are seeking to pass a bill which would ban strong encryption and make tech companies responsible for content users post on their platforms, limiting free speech and privacy.

Central Banks’ Printing Press

Central banks’ response has been drastic too. Bankers from the US, to Europe and Japan have slashed already low interest rates and approved unprecedented stimulus measures, including buyings ETFs and pledging to pour unlimited cash in the economy through bond purchases. This has often been met with government fiscal stimulus and corporate bailouts. Even so, markets have continued to slide because the bottom line is: For stimulus to work, there needs to be something to stimulate, and the global economy is shut down. Without demand to borrow, invest and spend, the cash central banks are pumping in the economy risks inflating prices and devaluing currencies, instead of boosting growth.

Over-Reaching Companies

With markets in free-fall, false information feeding a panicking public, and diverging views on how to best handle the pandemic, corporations and financial institutions have often chosen to restrict personal freedoms too. Banks in Poland limited foreign currency withdrawals, while there were reports that some US and German branches were also restricting how much cash clients could take out. Medium took down a post which argued the public is over-reacting to coronavirus, while Messari founder Ryan Selkis said he has been shadow banned from Twitter and his company’s MailChimp account is experiencing degraded service for his coverage on coronavirus.

In all these cases, power that’s been centralized at the top of a few entities is harming individuals. Cryptocurrencies, Web3 —a blockchain-based and more decentralized version of the internet— and open finance can offer a way out.

Independent Money

As central banks devalue their currencies, cryptocurrencies offer an independent monetary system, which doesn’t depend on bureaucrats in a room deciding to create currency out of thin air. In the case of Bitcoin, there’s a limit to how much coins will ever be created, in the case of Ethereum, monetary policy is the minimum issuance to secure the network. In the case of Dai, the stablecoin is always over-collateralized with other digital assets.

The near-zero and negative rates can be complemented with investment alternatives in decentralized finance, where rates currently are many times those in the developed world. That’s because the system is risker and less liquid, and also because it’s global, matching borrowers and lenders from different economies.

DAOs & Open Source

In the case of over-reaching corporations, decentralized autonomous organizations are able to create more democratic structures, where there are lower barriers to owning a piece of the organization and participating in its governance. DAOs’ rules written in code and can’t be change, unless its owners agree. Blockchain-based apps built on open source protocols will limit censorship, as some information will be stored on-chain, and platforms will be more easily replicated, giving users greater leverage. A great example is what’s happening with the Steemit social media Dapp: a large part of the community split from the project after co-founders sold it to Justin Sun, the founder of the Tron blockchain.

Some are already taking advantage of the immutable and permissionless qualities of blockchain technology to fight censorship from the Chinese government surrounding the virus: pieces of code were uploaded to the Ethereum network in the shape of a monument of Dr. Li Wenliang, the whistleblower of China’s coronavirus outbreak.

Virtual Life

Finally, a lasting effect of being locked up at home for weeks might be a greater propensity to work remotely and live generally more virtual lives. Museums are opening virtual exhibits, comedy clubs are streaming performances, even tour guides are offering virtual strolls through Central Park. This will get people to dip their toes in the water of virtual reality, and it will be just a small step from there to creating an avatar for Cryptovoxels or Decentraland.

Maybe one of the lessons of this crisis will be that some people will start to think it’s not so crazy to want to hold at least part of their savings in a system that’s completely independent from their central bank and government. They’ll understand why decentralized organizations and open source applications can better safeguard their liberties. And if they’re not, why it’s important that it’s easier to leave. Even if most are happy to go back to the way things were, at least some will know, there is an alternative. And even if they’re stuck with repressive governments, they can always go to a freer world, where no one can touch their digital assets, from Bitcoin to CryptoKitties.

Uniswap Unveils V2 With Flash Swaps, Potential Protocol Fees and Better Price Feeds

Uniswap yesterday announced details of its highly anticipated second iteration, or V2, which it expects to launch in the second quarter, pending a successful formal verification. Developers can already start building with Uniswap V2 on different Ethereum testnets. Uniswap V1, a venue for pooled, automated liquidity on Ethereum, will continue to work “for as long as Ethereum exists,” Uniswap co-founder Hayden Adams wrote in a post.

These are the main user-facing features of Uniswap V2:

  1. ERC20/ERC20 pools: In Uniswap V1, all liquidity pools are between ETH and a single ERC20 token, allowing  users to swap any ERC20 for any other ERC20 by routing through ETH, the most liquid Ethereum-based asset.

    The introduction of ERC20 token/ERC20 token pools “can be useful for liquidity providers, who can maintain more diverse ERC20 token denominated positions, without mandatory exposure to ETH,” Hayden wrote.

  2. Improved price feeds: Uniswap V2’s price feeds are harder to manipulate as they accumulate historical data, allowing external smart contracts to create gas-efficient, time-weighted averages of Uniswap prices across any time interval.

    “Despite closely tracking the real-world price most of the time, Uniswap V1 cannot be used safely as a price oracle because the price can move significantly in a short period of time,” the post said.

  3. Flash swaps: Similar to flash loans on other protocols, Uniswap V2’s flash swaps allow users withdraw as much of any ERC20 token as they want without upfront costs. They can then use those tokens for whatever they want provided that by the end of the transaction execution, they pay for or return all the tokens withdrawn. A 0.3% fee for liquidity providers is paid when tokens are returned.

    “Flash swaps are incredibly useful because they remove upfront capital requirements and unnecessary constraints on order-of-operations for multi-step transactions that use Uniswap.

  4. Potential for protocol fees: At launch, the protocol charge will default to 0, and the liquidity provider fee will be 0.30%. If the decentralized governance process deployed after the Uniswap V2 launch decides to turn on the protocol charge, it will become 0.05% and the liquidity provider fee will be 0.25%.

    “This feature, including the exact percentage amounts, is hardcoded into the core contracts which remain decentralized and non-upgradable,” the post said. “Without any additional growth, it will generate more than $5 million in liquidity provider fees this year. If the protocol charge was on, ~$830,000 of this would instead go to a decentralized funding mechanism used to support contributions to Uniswap and its ecosystem.”

Dharma Announced P2P Payments

Blockchain-based lending platform Dharma on Thursday announced users will be able to make peer-to-peer money transfers on its app. Because Dharma uses cryptocurrencies, payments can be between any two people in different parts of the world, unlike other payment apps like Venmo or Lydia. Deposits on Dharma, which can be made via debit card wherever Wyre is available, gain interest from Compound Finance lending pools.

MakerDAO Close to Raising Enough Dai to Heal Bad Debt

MakerDAO has raised 4.3 million Dai at MKR auction, compared with a total 5.6 million of underwater loans the system needs to pay off. About 17k MKR has been sold at declining prices, with the latest highest bids going for ~230 Dai, compared with ~$270 current MKR price, according to Dune Analytics.

Image source: Dune Analytics.


The Defiant is a daily newsletter focusing on decentralized finance, a new financial system that’s being built on top of open blockchains. The space is evolving at breakneck speed and revolutionizing tech and money. Sign up to learn more and keep up on the latest, most interesting developments. Subscribers get full access at $10/month or $100/year, while free signups get only part of the content.

Subscribe now

Click here to pay with DAI.There’s a limited amount of OG Memberships at 70 Dai per annual subscription ($100/yr normal price).

About the author: I’m Camila Russo, a financial journalist writing a book on Ethereum with Harper Collins. (Pre-order The Infinite Machine here). I was previously at Bloomberg News in New York, Madrid and Buenos Aires covering markets. I’ve extensively covered crypto and finance, and now I’m diving into DeFi, the intersection of the two.

Recap: DeFi Week of March 16 ?

https://thedefiant.substack.com/p/recap-defi-week-of-march-16-

Hello Defiers! Hope you’re having a great, self-isolated weekend 🙂

Summing up: The past week was all about the aftermath of ether’s +40% crash on the previous week and MakerDAO’s crisis, which resulted from that. The largest lending platform in DeFi cut borrowing rates to 0.5% and lending rates to 0%, and added USDC as collateral, to increase the Dai stablecoin liquidity. It also started to auction off its governance token MKR to raise enough Dai to cover the its bad debt, which resulted from the ether sell-off as the system to liquidate underwater loans broke down. While a flurry of measures have been taken, vault owners who got their entire position liquidated are wondering whether they’ll get compensated. As a result of the crisis, financial dapps had record activity, according to DappRadar. In non-MakerDAO and ether crash news, Alethio dug into its latest DeFi ecosystem map, which shows exploding growth. Ganesh Swami, co-founder of data firm Covalent, posted his first installment of our Flippening Series, where he’ll dig into the metrics which pulled him back to crypto and Ethereum when he was on his way out. And there’s more!

And this was just one week. Subscribe so you get the latest DeFi news and analysis straight to your inbox and you on’t miss a thing. Free-signups get partial content, paid subscribers (only $10/month, $100/year) get everything.

Subscribe now


Op-Ed Monday

DeFi Web Grows Amid Exploits and Market Turmoil

Alethio, a ConsenSys-backed data analytics firm, has mapped the DeFi ecosystem since it just started to emerge in 2018. Its latest update shows a growing, interconnected web of users in a galaxy that’s lighting up with new platforms. Alethio digs into its findings from the most recent map, and how it found that the ecosystem has grown in three key aspects: scale, diversity and connectivity.

Interview Wednesday

“I Feel Betrayed (…) This is Not the Decentralized Future We’re Hoping For,” Says MakerDAO User

The biggest losers of MakerDAO’s black Thursday are arguably Dai borrowers who got their entire collateral —about $5 million worth of ether— liquidated as ether plunged. While the DeFi community has come together to make sure there’s a buyer of last resort for MKR, somewhat limiting MKR token holders’ losses, there hasn’t been a decision on how and if collateral holders who lost 100% of their funds will be compensated. In this interview, one of the vault owners who got liquidated explains why he’s been put off MakerDAO and possibly all of DeFi.

Thursday

Dives

  • Part I of the Flippening Series with Covalent’s Ganesh Swami: How Climbing Mt. Everest Drove One Disillusioned Entrepreneur Back to Crypto

  • Dai Health Improves After MakerDAO’s Drastic Measures: It’s been two days since MakerDAO slashed rates and welcomed USDC into its system, a controversial move regarded by some purists as going against Dai’s very reason for being. Still, DeFi has kept defying and Dai health is improving.

Sums

  • MKR Climbs Ahead of Today’s Auction: MakerDAO’s governance token MKR is climbing as the system prepares to sell newly minted tokens to refinance bad debt resulting from last week’s ether sell-off.

Wednesday

Sums

  • Developer Builds Tool to Make Aave Liquidations Easy: iEarn Finance founder Andre Cronje built an interface to make it easy to liquidate loans on lending platform Aave.

  • Billionaire Bitcoin Bull Tim Draper Investing in DeFi: Billionaire bitcoin bull Tim Draper’s Draper Goren Holm Ventures is investing in DeFi Money Markets DAO (DMM DAO) in the form of DMG.

Bytes

Tuesday

Dives

  • MakerDAO’s Drastic Times Call for Drastic Measures: MakerDAO, which makes up roughly half of DeFi, has millions in bad debt resulting from ether plunging more than 40% last week, and is scrambling to contain damages with drastic measures.

Sums

  • Ether Plunge, MakerDAO Crisis Spur Record Dapp Activity: It’s not all bad news in Ethereum as ether plunged for than 40% and MakerDAO deals with its liquidity crisis —activity on some decentralized applications is surging to the highest ever.

Bytes

  • Coronavirus Spurs Virtual NY Blockchain Week


💜Community Love💜

Thanking all the amazing Defiers for the support and love this week (and always)!


The Defiant is a daily newsletter focusing on decentralized finance, a new financial system that’s being built on top of open blockchains. The space is evolving at breakneck speed and revolutionizing tech and money. Sign up to learn more and keep up on the latest, most interesting developments. Subscribers get full access at $10/month or $100/year, while free signups get only part of the content.

Subscribe now

Click here to pay with DAI.There’s a limited amount of OG Memberships at 70 Dai per annual subscription ($100/yr normal price).

About the author: I’m Camila Russo, a financial journalist writing a book on Ethereum with Harper Collins. (Pre-order The Infinite Machine here). I was previously at Bloomberg News in New York, Madrid and Buenos Aires covering markets. I’ve extensively covered crypto and finance, and now I’m diving into DeFi, the intersection of the two.

How Climbing Mt. Everest Drove One Disillusioned Entrepreneur Back to Crypto

https://thedefiant.substack.com/p/how-climbing-mt-everest-drove-one

Hello Defiers! I’m excited to announce The Flippening Series with Ganesh Swami, co-founder of Covalent, which provides blockchain data for businesses and investors and created an easy way to track an Ethereum addresses’s P&L. Ganesh is also a deep thinker in the space, and has written about staking yields, the data availability gap, the nuance in the v…


Read more

“I Feel Betrayed (…) This is Not the Decentralized Future We’re Hoping For,” Says MakerDAO User

https://thedefiant.substack.com/p/i-feel-betrayed-this-is-not-the-decentralized

Hello Defiers! In today’s issue:

  • An interview with one of the MakerDAO collateral owners who got 100% liquidated

  • Andre Cronje builds tool to make Aave loans liquidations easy

  • Tim Draper is investing in DeFi

Subscribe now


“I Feel Betrayed,” Says MakerDAO User After Losing $50K

The biggest losers of MakerDAO’s black Thursday are arguably Dai borrowers who got their entire collateral —about $5 million worth of ether— liquidated as ether plunged. While the DeFi community has come together to make sure there’s a buyer of last resort for MKR, somewhat limiting MKR token holders’ losses, there hasn’t been a decision on how and if collateral holders who lost 100% of their funds will be compensated.

Issuers of Dai loans on MakerDAO are usually sophisticated traders, aware that they were dealing with a risky system. Still, MakerDAO documentation had led them to believe the penalty for being liquidated was 13% of collateral. But last Thursday they lost all of it. Without much recourse, they’ve turned to MakerDAO’s forum to commiserate, while members of the MakerDAO team have said it’s up to the system’s governance to decide what to do about their losses, and that while they’re aware a decision has to be made, they’re not the priority at the moment.

MakerDAO team member who goes by the name LongForWisdom said in a forum:

“It’s pretty hard for us to make binding commitments as a DAO given that it’s a community made up of many people with differing views. About the best I can offer is to say that nearly everyone I’ve spoken to about it is open to having a discussion regarding compensation. […] I’m fully expecting all of you to scream bloody murder if it does look like we are sweeping it under the rug. But yeah, give us a few weeks, let us sort out our other more immediate problems then we will have that discussion.”

Below is an interview with one of the vault owners who got liquidated. He’s an 35 year old accountant who goes by the pseudonym Sandhaai, is based in South Africa, and has worked as a performance analyst for multinationals. He got into crypto in Sept. 2016 and understand DeFi mechanics from a financial point of view, but is not a coder so he “took the product at face value.” For that, he got badly burned and wouldn’t use MakerDAO again.

Camila Russo: When did you decide to open this CDP? What prompted you to do it? 

Sandhaai: I was looking for a way to effect low-level leverage on my crypto holdings

CR: About the CDP: Is it the only one you’ve opened, for how much was it, and what did you use the Dai for?

SH: Yes, I only opened one. At one stage up to 70k USD. When liquidated it was around 50k USD. I used some for trading – mostly for re-investing in crypto.

CR: Have you been at risk of getting liquidated before? 

SH: Not like this. Under normal circumstances you have the ability to adjust collateral before you are liquidated.

CR: What was your first reaction when ETH started diving last week? Did you take steps to save your loan/collateral? 

SH: I lowered my leverage by buying back DAI. I was OK on the Wednesday before, but did not anticipate the dive to 70 USD.

CR: Can you talk about the moment when you saw the collateral was gone? How did you find out, what was your first reaction, etc. 

SH: The evening before I tried to get transactions through to lower the risk. One transaction was still pending through the evening. The morning I woke up and checked where my position is at. It was terrible. It took a while for me to check the price and make peace with the fact that I had been liquidated, but I couldn’t really understand why my balance was zero and why I did not get some ETH back after the loan was sold. Only later on message boards could I see what actually happened.

CR: Do you think you were adequately informed of this risk? 

SH: No. I consider myself a pretty advanced crypto user for where we are at the moment especially if you factor in my finance background in this finance/crypto product.I took the product at face value as advertised – it’s marketed as a retail product with a smooth interface etc.

I feel betrayed if the Maker community will now turn around and say I should have audited the code or read the fineprint if I wanted to use their product. If that is the case and the product is only for experts it should be advertised as such. Did you read the fineprint for your last iPhone purchase? Last Amazon purchase? The 13% liquidation etc. was clear enough – I have no issue with that, but the average user should be protected if Maker is ever thinking about wide adoption.

I will be an active critic until this is the case because at the moment their customers (CDP holders) are onboarding a massive amount of additional non-obvious risk without being reasonably informed and that stinks – it’s not the decentralized future we’re hoping for and smells like normal corporate blame-shifting and their reputation is suffering for it.

CR: What’s the general mood among liquidated vault owners in different forums and social media? 

SH: In one word – betrayed. This you can see from the forums. The discourse is surprisingly mature, but you can see people got hurt. We are the platform’s customers and we are picking up the tab for “sorting out the bugs” with our life savings – who would want to take part in that?! This while the Maker holders have limited skin in the game.

CR: What’s your opinion of Maker’s answer to CDP holders so far? What would you like Maker to do? 

SH: So far I’ve not seen an official response except bailing out the other side of the transaction (the 4m USD). @MakerMan has raised the issue on the Maker forum for which I feel thankful. The issue should be addressed – not swept under the carpet.
Maker ecosystem should make whole the CDP holders that got liquidated with a zero bid
(21% collateral or whatever) – it should be seen as a cost of development & looking after loyal supporters.

DeFi is built on principle and this is a principle issue – we’re building this ecosystem together and we can’t let some take the hit for negative effects. Basically the same reasoning that drove them to bail out the depositors with a MKR issue. Everyone is taking part there – Dharma and all the rest – how are the CDP holders position different? Why are we left in the cold? It’s also for the brand/long term viability of the platform.

CR: Some will argue that vault owners getting 100% liquidated is the cost of doing business in such a risky space. What are your thoughts on that view? 

SH: Well…. there’s product risk and there’s platform risk. Product risk we all accept – Vault owners getting 66% liquidated is cost of doing business in such a risky product.
Platform risk is something different and that’s on the shoulders of the platform developers/managers.

If I drink Coke and I get fat and get a heart attack, well, that’s a risk I take. I don’t, as a Coke drinker, onboard the risk for a factory process that leaves a piece of a thumb in my can…even if you have some disclaimer in the fineprint and I should have done a factory tour to see the workers with long thumbs on the floor.

Then if we’re saying this is DeFi and product users are also taking on platform risk & Maker holders in this analogy don’t then it’s a crazy crazy product with a skewed risk/reward weighting.

CR: Would you borrow Dai on Maker again? If no, what would have to change? 

SH: I won’t. How would I know what other risks I’m taking on without being an absolute expert?! I don’t want to take on product risk & platform risk – that’s too much!

CR: Are vault owners considering legal action? 

SH: I think there may be enough energy for it, but that isn’t anyone’s first option.

CR: Has your opinion of DeFi changed after this? 

SH: It has. I’ve now been burnt as an early adopter while the platform owners rake it in – feels like any other ICO scam. I think it has promise for the future, but the risk/reward for a user at this point seems skewed to those with a stake in the platform, so it’s probably better to stay out.

Developer Builds Tool to Make Aave Liquidations Easy

One of the reasons MakerDAO’s system broke down last week was because of lack of competition from liquidators (traders/bots buying up collateral and paying off underwater loans for a fee). Curve Finance founder Andre Cronje built an interface to make it easy to liquidate loans on lending platform Aave. The tool uses flash loans, which allow traders to borrow without putting up any collateral, which means traders don’t need initial capital to profit from liquidations.

Billionaire Bitcoin Bull Tim Draper Investing in DeFi

Billionaire bitcoin bull Tim Draper’s Draper Goren Holm Ventures is investing in DeFi Money Markets DAO (DMM DAO) in the form of DMG — the soon-to-be-released governance token that will run the DMM DAO, according to the DMM Foundation’s  announcement

Meltdown In the Capital Markets Signals the Birth of the DeFi Era: Jonathan Joseph

Smart Money’s Jonathan Joseph writes about headlines that say latest developments show DeFi isn’t ready for prime time. “Perhaps the headline should be just how well DeFi held up under the kind of stress test that only comes once every few decades, as well as how quickly the ecosystem is adapting and becoming anti fragile.”

Ashwin Ramachandran of Dragonfly Capital on last week’s marker crisis: Despite the $5 million shortfall in MakerDAO, DeFi was able to handle record liquidations and activity in a congested Ethereum network quite well in a context where many expected it would have completely collapsed.

Gavin McDermott of IDEO has a little fun with the latest stimulus announcements from central banks.


The Defiant is a daily newsletter focusing on decentralized finance, a new financial system that’s being built on top of open blockchains. The space is evolving at breakneck speed and revolutionizing tech and money. Sign up to learn more and keep up on the latest, most interesting developments. Subscribers get full access at $10/month or $100/year, while free signups get only part of the content.

Subscribe now

Click here to pay with DAI.There’s a limited amount of OG Memberships at 70 Dai per annual subscription ($100/yr normal price).

About the author: I’m Camila Russo, a financial journalist writing a book on Ethereum with Harper Collins. (Pre-order The Infinite Machine here). I was previously at Bloomberg News in New York, Madrid and Buenos Aires covering markets. I’ve extensively covered crypto and finance, and now I’m diving into DeFi, the intersection of the two.

MakerDAO Fighting Liquidity Crunch With 0% Rates And a Dash of Centralization

https://thedefiant.substack.com/p/makerdao-fighting-liquidity-crunch-42b

Hello Defiers! These are busy times for crypto. Here’s what’s happening with decentralized finance:

  • MakerDAO brings out the big guns to fight the Dai liquidity crunch

  • It’s no all bad as dapp activity surges to records amid market bloodbath

  • Decentralized derivatives trading launches on Bitcoin’s Lightning Network

  • NY Blockchain Week will be largely virtual

You’re receiving this email because you’re a signed up for the free version of The Defiant (thank you!) That means you’re getting an abbreviated version of today’s newsletter. For access to the full content, subscribe now at $10/month, $100/year, or 70 Dai on this link.

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MakerDAO’s Drastic Times Call for Drastic Measures

Less than three years after its creation, decentralized finance’s existence is being tested. MakerDAO, which makes up roughly half of DeFi, has millions in bad debt resulting from ether plunging more than 40% last week, and is scrambling to contain damages with drastic measures.

MakerDAO last night approved to add fiat-backed stablecoin USDC as the third type of collateral borrowers can use to issue Dai. It also lowered rates even further, after slashing them last week, with the stability fee (similar to the borrowing rate) cut from 4% to 0.5%, while the Dai Savings Rate (similar to the deposit rate) cut from 4% to 0%.

The point of all these measures is to add more Dai to the system. The most serious consequence of last week’s so-called “black Thursday,” where one trader was able get more than $4 million of ether collateral for free, is that Dai liquidity, which was already low, is drying up.

Why There’s a Dai Liquidity Crunch

Traders are buying Dai, removing the stablecoin from circulation, to pay down their loans as the value of their ETH collateral declines and threatens to fall below the required 150% ratio. Some may be accumulating now, even if their loans are healthy, in case ETH suffers another sharp drop.

Users are loath from issuing new Dai on concern the ETH collateral they’d put up to back their loan, risks getting liquidated.

Others may be buying the stablecoin to participate in Thursday’s auction of MKR tokens, which MakerDAO is holding to raise enough Dai to recapitalize the system.

Market Reaction

The most direct reaction to a Dai liquidity crunch is that it has caused the stablecoin to lose its peg to $1, and traded as high as $1.1 Monday and $1.22 Thursday.

Dai price. Image source: coingecko.com

With rising demand to borrow Dai in the secondary markets (read: anywhere but MakerDAO), utilization ratios, or the total amount borrowed versus the total amount supplied for lending, are nearing 100% on dYdX and Compound Finance. This is caused lending rates to surge to as high as almost 40% yesterday, compared with less than 9% last week.

Even with lending platforms paying double-digit rates to deposit Dai, savers aren’t biting. Dai locked in DeFi is sliding, down 57% to just below 36 million, from a 83.6 million a week ago. Between drawdowns and the plunge in ETH price, total value locked in DeFi has almost halved from the start of the year, when it crossed the $1 billion milestone.

Image source: DeFi Pulse.

MKR has more than halved in price since Wednesday, the day before last week’s crash, and is now trading at $211, down from more than $500 a week ago, in anticipation of a supply shock after the auction.

What’s Being Done

MakerDAO is proposing a series of measures aimed at increasing Dai circulating in the market so that liquidators, a.k.a. “keepers,” are able to buy up the stablecoin to trade for ether collateral. This minimizes the risk of having keepers making $0 bids and going off with free ether.

The most important response was to add USDC, a stablecoin that’s backed by US dollars, as collateral. The goal is to diversify the types of digital assets backing Dai, so it doesn’t largely depend on a single cryptocurrency and is more resilient in the case of the extreme volatility of last week. Having a liquid, fiat-backed stablecoin, in addition to ETH and BAT currently accepted, also ensures there are enough assets that can be used to issue Dai.

The measure is controversial, as it means that for the first time, an asset that’s backed by US dollars in a bank, and therefore not as decentralized as ETH or BAT, will be backing Dai. To many, Dai was attractive because it was completely decentralized. Now that a fiat-backed stablecoin is backing it, it’s less so.

This was criticized by many in the DeFi space when initially proposed last year, but in times of market turmoil, it seems those concerns were overlooked.

The way the measure was approved was also controversial. The Maker team asked in a poll, whether the community wanted to add USDC, but it was only open for an hour and 45 people voted. The measure later passed in what Maker calls a “continuous vote,” which means MKR token holders who didn’t agree with the proposal, would have had to vote for the current state of the system.

Image source: forum.makerdao.com

MKR holders also approved proposals to: 1) Reduce the time for governance decisions to be executed to 4 hours from 24 hours. A reminder that this was just recently set to 24 hours from no delay, to prevent governance attacks. 2) Activate the option to freeze liquidations, in the case keepers need time to source more Dai.

More straightforward, but still dramatic, were decisions to cut the stability fee (borrowing rate) to 0.5% and DSR (deposit rate) to 0%. That means it’s now a lot cheaper to borrow Dai from Maker than from other DeFi platforms, whose rates range between around 6% and 11%.

It’s also an incentive to sell Dai, as Maker is currently offering no interest for deposits. That’s not true in other platforms though, as Dai deposit rates in Compound Finance, for example, are at almost 8%. MakerDAO has served as a benchmark for other DeFi platforms, so rates should eventually drop.

Results?

It’s early to tell whether all this will work, but for now, Dai was treading back to its peg and trading at $1.02, while Dai supply was still sliding.

Dai price (line), versus Dai supply (shaded). Image source: Coin Metrics

[Correct from earlier chart fro mkr.tools which showed supply for SCD, not MCD]

Ether Plunge, MakerDAO Crisis Spur Record Dapp Activity

It’s not all bad news in Ethereum as ether plunged for than 40% and MakerDAO deals with its liquidity crisis —activity on some decentralized applications is surging to the highest ever.

Decentralized Derivatives Trading Now Possible on Bitcoin

LN Markets, a derivatives trading platform built on the Lightning Network, is live on the Bitcoin mainnet in its public alpha. The Lightning Network is a protocol on top of Bitcoin which enables peer-to-peer, permissionless payments.

LN Markets leverages the Lightning Network as a settlement layer to provide a completely new experience where trading and transfer of bitcoin funds are done at the very same time, in one click.”

Coronavirus Spurs Virtual NY Blockchain Week

Synthetix’s Kain Warwick offers the most up-beat Twitter thread on the past days’ market turmoil.


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The Defiant is a daily newsletter focusing on decentralized finance, a new financial system that’s being built on top of open blockchains. The space is evolving at breakneck speed and revolutionizing tech and money. Sign up to learn more and keep up on the latest, most interesting developments. Subscribers get full access at $10/month or $100/year, while free signups get only part of the content.

Subscribe now

Click here to pay with DAI.There’s a limited amount of OG Memberships at 70 Dai per annual subscription ($100/yr normal price).

About the author: I’m Camila Russo, a financial journalist writing a book on Ethereum with Harper Collins. (Pre-order The Infinite Machine here). I was previously at Bloomberg News in New York, Madrid and Buenos Aires covering markets. I’ve extensively covered crypto and finance, and now I’m diving into DeFi, the intersection of the two.

DeFi Web Grows Amid Exploits and Market Turmoil

https://thedefiant.substack.com/p/defi-web-grows-amid-exploits-and

Hello Defiers. Alethio is a ConsenSys backed data analytics firm which has mapped the DeFi ecosystem since it just started to emerge in 2018. Its latest update shows a growing, interconnected web of users in a galaxy that’s lighting up with new platforms. In the following post, Alethio digs into its findings from the most recent map, and how it found th…


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Ether Plunge Tests DeFi Giant While Ripple Effects Have Just Begun

https://thedefiant.substack.com/p/ether-plunge-tests-defi-giant-while

Hello Defiers, yesterday was a big day for crypto and DeFi, with the entire market crashing. A more than 30% plunge in ETH caused a $4 million shortfall in MakerDAO’s system, whose members went as far as to considered an emergency shutdown, which has now been averted. Still, DeFi and Maker aren’t in the clear yet. Dedicating this issue to MakerDAO’s black Thursday.

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MakerDAO Avoids Shutdown As Ripple Effects Begin

DeFi giant MakerDAO was almost brought to its knees by what’s becoming an increasingly common new problem in the space —faulty oracles— and by an issue that’s plagued Ethereum from the CryptoKitty days —a congested network. 

The space has come up ahead each time. Will it now? It probably will, but traders are paying the price. And not just MakerDAO holders and borrowers; all of DeFi will feel the ripples. Today, MakerDAO’s MKR token holders are voting to slash rates by about half to 4% from, which makes open finance more attractive for borrowers, who are mainly sophisticated traders, but could drive away savers, or the more mainstream users DeFi has.  

Here’s What Happened

As with any market debacle these days, it starts with COVID-19 pushing all asset prices lower. Ether was no exception, plunging more than 30% yesterday. MakerDAO is holding millions of dollars in ether, which was deposited by traders who got the Dai stablecoin in return. When the ETH price falls, the collateral that’s backing Dai becomes less valuable. When the collateral ratio falls below the required 150%, those Dai loans (the Dai users took out against ETH) get liquidated and there’s an auction for the ETH collateral. Liquidators pay for the ETH in Dai, the Dai is used to pay off the debt and then burned, and if some ETH is left, it’s returned to the borrower.

There was a perfect storm which allowed a liquidator to run off with $4.5 million of ETH collateral for free, without actually breaking any rules, caused by the following:

1) The market crash increased the number of transactions on the Ethereum netowrk and this raised the average gas price per transaction —gas is the unit paid for computation on Ethereum. That means anyone wanting to transact on Ethereum was required to pay higher fees than usual.

2) MakerDAO has 14 so-called oracles, which feed market prices to the system. The oracle system failed and was telling Maker the ETH price was higher than it actually was.

The high gas and ETH prices required to buy ETH collateral from liquidated loans meant no liquidators wanted to put up bids —except for one, who took advantage of the lack of competition and placed bids for 0 Dai. The high gas prices didn’t matter because he would be taking home free ETH, and there was no-one else to outbid them. Result: They got millions in ETH for free. 

Image source: daiauctions.com

Market Reaction

MakerDAO’s MKR, the token that’s used to vote in governance, plunged almost 60% to as low as $191 the lowest ever.

MKR’s falling knife. Image source: coingecko.com

Dai’s 1-to-1 peg with the dollar, which had already eroded in the past few days with Dai trading at above $1, broke further, with the stablecoin trading at $1.06, the highest since the system’s upgrade to multi-collateral Dai in November 2019. Dai had been trading above $1 as an increasing number of traders switched to the stablecoin from more volatile crypto assets amid a market sell-off.

Image source: coingecko.com

Low Dai liquidity has caused lending rates to spike across the board in DeFi platforms, to as high as almost 24% on dYdX.

Image source: ConsenSys Codefi Data

MakerDAO wasn’t the only lending platform under stress, as plunging ETH caused loans to get liquidated across the board:

Image source: Twitter

It’s worth noting, that even though the MakerDAO system is undercapitalized, it’s not undercollateralized. The system;’s collateralization ratio is at over 260%, the lowest in about two months.

Image source: mkr.tools

Aftermath

How to cover the $4 million shortfall ($4.5 million the liquidator took, minus the $500k in surplus the system had)? MakerDAO members agreed on a call to mint and sell additional MKR tokens and raise the Dai needed to cover the bad debt. At current market prices, about 17,000 MKR would need to be minted. With current MKR circulating supply at 986k, that would put total supply back at 1 million. For context, MKR tokens are used to pay so-called stability fees —similar to a loan’s interest rate— and burned after the fee is paid. This mechanism is meant to reduce supply and make sure MKR token holders benefit as activity on the platform increases (burning MKR tokens, leads to lower supply, lower supply should lead to token appreciation). This additional issuance has the potential to push MKR supply back to its highest ever. (h/t to Aave’s Marc Zeller for pointing this out).

To prevent 0$ bids from winning a liquidation auction in the future, MakerDAO members are discussing possible solutions, according to a summary of yesterday’s call.

MKR holders are also voting to lower the stability fee (similar to the system’s borrowing rate) dramatically lower the rate by 5.5 ppts. to 4%. This should incentivize borrowers to issue more Dai loans, increasing Dai supply and helping the peg fall back to $1. The system’s lending rate, the so-called Dai Savings Rate, which is pegged to the borrowing rate, would also be set at 4%. Today DSR is at 8.5% and driving users into the space. With savings rates falling to not that much higher than fintechs like Betterment, the DeFi’s draw for mainstream becomes weaker. 

Biggest Losers

The most directly impacted from MakerDAO’s black Thursday are holders of Dai loans, which got liquidated and weren’t able to get any of their ETH back, and MKR holders, as the token continues sliding on the expectation that additional supply will be poured into the market.

What is though is that Ethereum dapps have seen worse, and come back stronger. This can be the case for MakerDAO too.


The Defiant is a daily newsletter focusing on decentralized finance, a new financial system that’s being built on top of open blockchains. The space is evolving at breakneck speed and revolutionizing tech and money. Sign up to learn more and keep up on the latest, most interesting developments. Subscribers get full access at $10/month or $100/year, while free signups get only part of the content.

Subscribe now

Click here to pay with DAI.There’s a limited amount of OG Memberships at 70 Dai per annual subscription ($100/yr normal price).

About the author: I’m Camila Russo, a financial journalist writing a book on Ethereum with Harper Collins. (Pre-order The Infinite Machine here). I was previously at Bloomberg News in New York, Madrid and Buenos Aires covering markets. I’ve extensively covered crypto and finance, and now I’m diving into DeFi, the intersection of the two.

DeFi10 Fund Beats Stocks and Bitcoin in Market Storm

https://thedefiant.substack.com/p/defi10-fund-beats-stocks-and-bitcoin

Hello Defiers! It’s a grim day for markets. Global stocks are plunging, bond yields are soaring, crypto is tanking, and not even supposed safe havens like gold are getting a break. I think it’s a good time to update you on how my DeFi10 portfolio is doing.

At the start of the year, I invested 100 Dai in 10 decentralized finance platforms, plus one benchmark for a total of 1,100 Dai, with the intention of testing a wide range of DeFi projects and also tracking their performance throughout the year. My requirement was that they be passive investments that I could just park to gain interest and/or fees. [Read my two posts here and here]. Nine weeks in and amid a horrible start to the year, the DeFi 10 is beating other risky assets. As of yesterday, it was up 4%, while most assets tanked.

I will continue updating you on the performance of this DeFi portfolio. Subscribe to be up to date on this and everything decentralized finance. Paid subscribers can join me on our new Discord chat group to discuss!

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DeFi10 is Beating Stocks, But it’s No Safe Haven

Decentralized finance is turning out to be a decent place to weather the storm —but don’t go as far as calling it a safe haven.

A portfolio of 10 investments in decentralized finance platforms plus a benchmark, which I call DeFi10, is outperforming risky assets including crypto, U.S. equities, high-yield bonds and emerging markets stocks. But amid the recent market bloodbath driven by worries that COVID-19 will cause a global recession, traditional safe havens are gaining, putting the DeFi10 behind gold and U.S. Treasuries.

Performance so far shows that passive investing in decentralized finance, which mainly consists of depositing digital assets in lending pools, and gaining interest from the loans being taken out of those pools, can prove to be less volatile than crypto, which means lower gains on the way up, but also minimized losses on the way down.

DeFi 10 is down 3% to $1,065 from the $1,100 invested on Jan. 9, outperforming the S&P 500 which plunged 16% in that time, and BTC, which is down 23%. Meanwhile safe havens like gold futures are up about 6% in that time.

Image source: The Defiant, with data for major assets from Yahoo Finance

Just yesterday though, DeFi 10 was gaining 4% to $1,045. That’s because while eight of the 10 investments are in Dai, the stable coin that’s pegged at 1-to-1 with the dollar, three (i.e. 30% of portfolio weight) have exposure to ether. Volatility in the ETH-based portion of the portfolio explains the big swings. Taking out the three ETH investments and using only Dai-based, the portfolio would be up 0.3% in the past nine weeks (down from 1.7% until yesterday).

Here’s how the portfolio is made up:

Image source: The Defiant, ETH-exposed investments represented with (*)

ETH-Exposed Investments

The last three investments in that table —TokenSets, MKR Unipool and SNX Unipool— have an ETH-based component. With ETH plunging 28% just today, investments in Uniswap liquidity pools, which require holding tokens like SNX and MKR and also ETH, are dragging down the whole portfolio —DeFi10 would be up if it wasn’t for those two investments. The flip side is that when ETH was surging earlier this year, they were helping DeFi10 benefit from the crypto rally.

TokenSets is a different story. The platforms allows users to automatically follow different trading strategies. 10% of DeFi10 invested in the 20-day moving average for ETH. This means TokenSets automatically took my investment and switched it from ETH to USDC when the ETH price crossed under the 20DMA, and from USDC to ETH when is crossed over. This piece of the portfolio has shown the most consistent gains.

Interest-Bearing Dai Investments

There’s a distinction to be made here between MakerDAO’s DSR and iDai, aDai, Chai and cDai tokens. DSR is short for Dai Savings Rate, and it’s the interest savers make for depositing their Dai in the MakerDAO system. The rate is decided in a vote by MKR token holders, and serves as a benchmark for the rets of the DeFi platforms. Right now, the rate is at ~8%. Tokens like cDai and aDai, issued by Compound Finance and Aave respectively, allow users to earn interest from lending their Dai via these platforms. Interest gets accrued directly on the tokens —it’s like holding a derivative of a savings account.

Surprisingly, almost no interest-bearing tokens was able to beat the benchmark, MakerDAO’s DSR. The main reason for this seems to be that the fees paid to exchange Dai for these tokens eat into the return, which I’m calculating from the initial 100 Dai investment. This may well be reversed if there’s a fee to pay for withdrawing Dai from MakerDAO’s Oasis platform at the end of the year, when this experiment ends. iDai, issued by Fulcrum, was the only one able to beat DSR, and that’s because interest rates offered by the platform spiked after it suffered a financial attack from arb traders.

Image source: The Defiant, with data for major assets from Yahoo Finance

Yield Aggregators

Yield aggregators are an exciting new category emerging in decentralized finance. These projects allow users to deposit their funds, and have these platforms automatically distribute the investment across the DeFi platforms offering the best yield at any given time. The DeFi10 portfolio includes two yield aggregators, IdleFinance and Staked’s RAY. It’s worth noting that in this case, the return I’ve had isn’t the best representation of how these platforms work.

In both cases, I had to buy Sai (the old version of Dai, which is being phased out), because the platforms hadn’t upgraded to offer Dai yield aggregators. In the case of RAY I swapped 100 Dai for Sai, while in IdleFinance I swapped the equivalent of $100 in ETH for Sai, using Uniswap both times. I lost some money in these swaps, because of the exchange rate and because of fees, which lowered the amount I ultimately put in, and lowered the return. Judging only from the amount I put in, IdleFinance has delivered an impressive 7.8% return (from 92.5 Dai to 99.7 Dai).

Here’s a snap-shot of my previous post, which has a PDF with the steps needed for each investment. Source: The Defiant

Out of the Box

The final investment to talk about is PoolTogether, the no-loss lottery. At PoolTogether, funds deposited to buy virtual lottery tickets are used to earn interest in DeFi. Every week, an address is picked to win the interest earned by the funds in the pool. It’s no loss, because you can always retrieve the same amount you put in. The 100 Dai I deposited for 100 tickets will be continually playing to win every week’s lottery. I haven’t won anything yet.

Tracking

There are different platforms that connect to Ethereum wallets and help users track their portfolio, including DeFi Prime’s tracker, DeFiSnap, and Zerion. DeFiSnap was the only one I found was able to spot every single one of my investments. It also gives an easy way to visualize your history of transactions. It’s not great at seeing exactly what the gain/loss has been for each investment. DeFi Prime’s tracker was great for seeing this, breaking down investments by interest earned and annualizing the return.

I’m pretty proud to have been able to beat the S&P 500 with a full-fledged open finance fund (as unsophisticated as this one), which required no brokers or bank accounts.


The Defiant is a daily newsletter focusing on decentralized finance, a new financial system that’s being built on top of open blockchains. The space is evolving at breakneck speed and revolutionizing tech and money. Sign up to learn more and keep up on the latest, most interesting developments. Subscribers get full access at $10/month or $100/year, while free signups get only part of the content.

Subscribe now

Click here to pay with DAI.There’s a limited amount of OG Memberships at 70 Dai per annual subscription ($100/yr normal price).

About the author: I’m Camila Russo, a financial journalist writing a book on Ethereum with Harper Collins. (Pre-order The Infinite Machine here). I was previously at Bloomberg News in New York, Madrid and Buenos Aires covering markets. I’ve extensively covered crypto and finance, and now I’m diving into DeFi, the intersection of the two.

DeFi Complexity Breeds Attacks, White Hat Superhero Samczsun Says

https://thedefiant.substack.com/p/defi-complexity-breeds-attacks-white

Hello Defiers! This week’s interview is with the white hat hacker who goes by Samczsun and has quickly become a DeFi legend for uncovering bug after bug, even on projects that have been audited. He does this in his free time and discloses his findings to companies in exchange for “bounties” or rewards for the service —what’s known as a “white hat” hacker. But these bounties are only a fraction of the financial benefit he could get by exploiting these vulnerabilities, so pure profit isn’t his only incentive. Knowing that he helped prevent dapp users from losing their money is the other driver —no wonder he has been hailed as a hero.

He recently made headlines for finding vulnerabilities in decentralized insurance project Nexus Mutual, authentication service Authereum, and for helping bZx fix the bugs that got exploited in the biggest financial attacks to DeFi —which he had also warned about last year. He has also uncovered bugs in 0x, Curve Finance, Ethereum Name Service, Kyber Network and DDEX.

In this interview he talks about:

  • The double edged sword of open source as it makes it easy for hackers to exploit applications, but also allows researchers to find bugs

  • Why developers should have ways to respond in an emergency, including using the controversial “pause button”

  • Vulnerabilities he helped uncover that stand out to him the most

  • Why he focuses on Ethereum and whether DeFi is especially vulnerable

  • His motivation for doing this

This time, the interview will be fully available for free and paid subscribers. To get full access to exclusive interviews every week, subscribe now.

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Camila Russo: Approximately how many major security vulnerabilities have you been able to find in your career?

Sam Sun: A little over 10, depending on what you count as “major.” I’m keeping a list of public disclosures on my website at https://samczsun.com/research/

CR: Which ones stand out to you the most? (either because they were the toughest to spot, because you prevented loss of funds, or for any other reason)

SS: I would have to say:
– 0x, for being my first public disclosure and also the bug with the highest (if not one of the highest) financial impact
– A Geth consensus bug, which could’ve caused a hard fork if exploited
– The oracle attacks, given the past couple of weeks
– The ENS bug, for how long it managed to stay hidden before being found, and also how simple the contract itself was

Image source: Samczsun’s website https://samczsun.com/

Why Ethereum

CR: Why focus on Ethereum?

SS: The space is growing tremendously quickly and there’s not nearly enough security researchers to cover all the new area.

CR: For how long have you done this and has Ethereum always been your main focus?

SS: Definitely not. I’ve bounced around security trying a lot of other things and I also don’t expect Ethereum to be what I end with.

CR: What is your process like? Do you follow some sort of method, like checking each new protocols’ code, do you check contracts that specifically interest you, or is it based on requests, or something else?

SS: I mainly look around for projects that are being discussed or contracts which are seeing a lot of traffic. It’s all completely arbitrary though. Sometimes people reach out with requests too, which is good for getting a project on my radar but it doesn’t necessarily mean I’ll look into it.

Open Source Blessing and Curse

CR: It seems like there have been many DeFi vulnerabilities found lately. Is this space more prone to vulnerabilities than others, say blockchain games, for example? If so, why?

SS: Games have bugs too (see: Cheese Wizards), but they don’t get as much attention as the big DeFi apps. I think generally speaking, the number of bugs is strongly related to the complexity of the code and DeFi apps are usually very complex.

CR: Does open source help or hurt, in terms of project security?

SS: Open source is a double edged sword. On one hand, it makes it easier for security researchers to find bugs. On the other hand, it makes it easier for hackers to find bugs. At the end of the day though, a motivated hacker will put in the effort to disassemble your code if they need to. Why make it harder for the researchers to do their part?

CR: After what you’ve seen, what recommendations would you give those who are putting money in DeFi?

SS: I would refer users to this post from ConsenSys which goes into this very question: https://diligence.consensys.net/blog/2020/03/questions-defi-users-should-be-asking-defi-developers/

DeFi Recommendations

CR: What recommendations would you give DeFi developers?

SS: Make sure you’re thinking about security every step of the way. If your design is flawed or your code is unreadable, no amount of auditing will save you. Also think about how to response to a potential incident. As an example, Curve Finance was deployed with no emergency pause functionality which made the incident response very stressful. Now their contracts have a way for protocol administrators to disable swaps while allowing users to withdraw liquidity. If another bug is found, it’ll be much easier to resolve.

CR: Can financial attacks like the ones we’ve seen be prevented?

SS: I think it’s possible to claim that a project is protected against current attacks, but there’ll always be new attacks that have yet to be conceived.

CR: What are your thoughts on DeFi, more broadly? Is it an improvement over traditional finance? Do you think it will continue growing like it has?

SS: No opinions here.

White Hat Motivation

CR: Why do you do this / What’s your main motivation?

SS: There are a lot of users out there who’ve put a non-trivial percentage of their money (possibly their savings) into this. While you could blame them for not doing due diligence, the fact is that not everyone has the technical knowledge to audit every protocol they’re about to use. Given the choice between preventing a devastating loss for hundreds of “innocent” people or not, I think the decision is obvious.

CR: Are bug bounties enough incentive for independent white hat hackers? What would you tell projects should do to incentivize more of this research?

SS: For independent white hat hackers, sure, bounties are just a nice bonus for their white hat work. Frankly speaking though most bounties don’t offer nearly the same amount of compensation that a hacker could get from just exploiting whatever bug they find. Case in point, bZx’s bug bounty would’ve netted the attackers $5,000 instead of $300,000 and $600,000. Unfortunately, I don’t think there’s much that can be done here – most projects don’t have the financial backing to pay a big bounty, and the financial incentive is often the strongest one.

Community Support

CR: There’s been an outpouring of gratitude from the Ethereum community for your work. Any comment on Gitcoin grants’ efforts?

SS: I was pleasantly surprised by the amount of support from the community. Gitcoin is doing great work making it easy to fund community projects and I look forward to round 5.

CR: Looking forward, do you see yourself as an independent security researcher in the long term, or have you ever considered joining a security firm, or even doing something else?

SS: I think I’ll always be doing bug bounties in my spare time. As for where I’ll be in the future, you’ll just have to stay tuned!


The Defiant is a daily newsletter focusing on decentralized finance, a new financial system that’s being built on top of open blockchains. The space is evolving at breakneck speed and revolutionizing tech and money. Sign up to learn more and keep up on the latest, most interesting developments. Subscribers get full access at $10/month or $100/year, while free signups get only part of the content.

Subscribe now

Click here to pay with DAI.There’s a limited amount of OG Memberships at 70 Dai per annual subscription ($100/yr normal price).

About the author: I’m Camila Russo, a financial journalist writing a book on Ethereum with Harper Collins. (Pre-order The Infinite Machine here). I was previously at Bloomberg News in New York, Madrid and Buenos Aires covering markets. I’ve extensively covered crypto and finance, and now I’m diving into DeFi, the intersection of the two.

Tokenized Shirts Are Selling for +$500 in Ethereum Dexes Amid Market Bloodbath

https://thedefiant.substack.com/p/tokenized-shirts-are-selling-for

Hello Defiers! It’s a grim day for markets today, but this piece about the popping digi-physical token market will hopefully cheer you up, as it shines a light into the bleeding edge of this intersection of blockchain and finance. Here’s what’s happening:

  • The market for tokenized physical items is soaring

  • DeFi galaxy is having a big-bang moment, Alethio graph shows

And more 🙂

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Digi-Physical Tokens to Change Ownership as We Know It

Digital money and the physical world are becoming more intertwined than ever. The result is radically amplified product ownership by users and creators.

What’s happening in simple terms is that creators are selling real-life items via cryptocurrency tokens trading in decentralized exchanges, which anyone can access. The first to do this was Uniswap Exchange with Unisocks [Read my post on Unisocks here]. The space is gaining steam, with MetaFactory and Zora recently launching digital marketplaces for scarce physical items, which they also help create.

Trading physical goods via tokens on dexes, in itself doesn’t seem that revolutionary (though it is amazing that anyone can go in these platforms and trade without giving up personal information or relinquishing control of their funds, Dexes have been around for a few years now.)

But what if I told you socks are being sold for $90 and a t-shirt is going for over $500? Pretty crazy, but those of you aware of the “hypebeast” trend, will know some Yeezy shoes have sold for over $3,000, and a Supreme hoodie went for $12,000.

So here’s what’s different:

1. Creators reap rewards: Traditionally, creators of viral products and cult items benefit from only part of the value they’re creating. After they sell their products, the items’ most significant appreciation happens in the secondary market. In this new model, each item is represented by a cryptocurrency token and its price is determined in an open, free market. That means creators sell their goods for what people are actually willing to pay for them, and benefit directly from the interest they create around their brand.

2. A way to bootstrap: Creators can also use these tokens to bootstrap their work, by selling them even before their product has launched. Their supporters can buy up these tokens, which are redeemable for the product, and creators can use the proceeds to actually make the product. The tokens’ price in the secondary market can also help them gauge what a fair price for their items is.

Take the case of Zora marketplace mentioned above. They created the Saint Fame fashion brand and sold FAME tokens linked to a t-shirt which hadn’t even been designed yet. All people knew is that Matt Vernon, a.k.a. Dapp Boi, who designed notable DeFi projects like Synthetix and Dharma, would be behind it

3. Trend-setters benefit: On the side of the user, early trend setters and fans are able to buy goods at a discount, as they’ll be able to snap up tokens before they appreciate. For example, SOCKS tokens, linked to the $90 socks sold by Uniswap mentioned earlier, was selling for $12 in May. FAME tokens were trading at $8 when they first launched in December and have soared to over $700 after catching the attention of influencers including NBA player Malcolm Miller..

Image source: Twitter

Uniswap’s SOCKS and Zora’s FAME tokens surged to records of $107 and $777 respectively in the past three days. But even digi-physical tokens are suffering today’s market slump, with FAME down 29% to about $539, while SOCKS is down 13% to almost $90. Ether is down more than 10% to just over $200.

Source for images: Uniswap.info

4. Owning the brand: Consumers will also be able to “buy the brand” as opposed to buying a specific item. Because tokens are divisible, fans who want to both support a creator and also benefit from their success, can buy fractions of a product. If the brand does well, their token will gain in value.

People are already buying fractions of the FAME token, which means they want to own a piece of the Saint Fame brand, not the actual shirt.

Image source: Uniswap.info

And beyond just owning the token, token holders can potentially have a say in the company itself, just like shareholders. Both MetaFactory and Zora are DAOs, or decentralized autonomous organizations. That means the projects are owned by token holders, who have voting power. This is an emerging kind of organization which extends decision making beyond a small team of managers, and enables a new kind of company, which can be truly “internet-owned,” as Zora says.

5. IRL/VR integration: Tokenized objects can open the way into a seamless integration of the digital and the physical worlds. MetaFactory is leading the way here, as it plans to create a non-fungible token for each product they create, and deliver them with each physical item. These digital collectibles will be integrated with virtual reality world Cryptovoxels. Those who buy MetaFactory’s reversible hoodie, will be able to wear it in “real life” and also via their avatars in the virtual world.

6. Tokens will be tokens: Ethereum-based tokens linked to physical objects can also be used in decentralized finance as one more “money lego.” MetaFactory is innovating here by rewarding buyers with a proportional share of the project’s sales, directly adding value into their digital token. That means buyers of MetaFactory’s tokens will automatically start earning interest.

And we’re starting to scratch the surface, with just a couple of tokenized goods being traded at the moment, and a handful of companies dedicated to these internet-owned fashion brands. The potential for growth is huge. The market for resale sneakers and streetwear in North America alone is projected to reach $6 billion by 2025 from $2 billion today, according to Cowen, an investment bank, cited by The New York Times. Digi-physical tokens —or whatever they end up being known as, because that’s not the greatest name— could take a slice of that market.

Right now, all of the hype surrounding these scarce physical goods like cult sneakers and handbags is created online. It only makes sense that their markets are too.

DeFi Galaxy Having a Big Bang Moment

Ethereum analytics firm Alethio just updated its amazing visualization of the decentralized finance ecosystem, showing how the DeFi galaxy is quickly expanding, with the number of users and platforms growing in an interconnected web. The images speak for themselves:

Autonocrats and Anthropocrats: Lane Rettig

Ethereum developer Lane Rettig says the most important political debate of our generation has nothing to do with democrats and republicans; it will be about how dependent we are on automated system. “In an age when enormous financial and technology companies are to a great extent unaccountable to their users or to society at large, and are increasingly engaging in arbitrary censorship and deplatforming, there is clear value in systems that treat all users equally and fairly. To a blockchain—indeed, to any computer algorithm—you are no more and no less than the data that represent you.”

Ken Deeter at Electric Capital makes the case that DeFi’s superpower is atomic transactions, not decentralization.


The Defiant is a daily newsletter focusing on decentralized finance, a new financial system that’s being built on top of open blockchains. The space is evolving at breakneck speed and revolutionizing tech and money. Sign up to learn more and keep up on the latest, most interesting developments. Subscribers get full access at $10/month or $100/year, while free signups get only part of the content.

Subscribe now

Click here to pay with DAI.There’s a limited amount of OG Memberships at 70 Dai per annual subscription ($100/yr normal price).

About the author: I’m Camila Russo, a financial journalist writing a book on Ethereum with Harper Collins. (Pre-order The Infinite Machine here). I was previously at Bloomberg News in New York, Madrid and Buenos Aires covering markets. I’ve extensively covered crypto and finance, and now I’m diving into DeFi, the intersection of the two.

New EY-Led Protocol Provides DeFi Plug-In for Companies

https://thedefiant.substack.com/p/new-ey-led-protocol-provides-defi

Hello Defiers! here’s what’s going on in decentralized finance,

  • EY, ConsenSys and Microsoft create Baseline Protocol to make public blockchains safe for corporations

  • pTokens want to bring Bitcoiners to DeFi

  • Ether whales starting to accumulate

  • India and South Korea get crypto regulatory breakthroughs

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EY-Led Baseline to Provide DeFi Plug-In for Companies

EY announced it’s leading an open source initiative called Baseline Protocol for businesses to connect their processes via distributed networks, without having to reveal their public information. If this catches on, it could provide a way for big corporations to plug into decentralized finance.

The main challenge for companies to use public blockchains, such as Bitcoin and Ethereum, has been that these networks expose users’ transaction history. The most common solution has been for companies to use private blockchains, which protect sensitive data, but compromise on immutability, security and composability, often destroying the whole point of using blockchain technology in the first place.

The Baseline Protocol, which EY partnered with ConsenSys and Microsoft to create, wants to provide a better solution for enterprises. Its goal is to standardize the most common ways companies interact with each other and create packages of public domain tools to help them build and deploy processes on the public Ethereum blockchain. The protocol integrates technologies including zero-knowledge proofs to keep companies’ private data, private.

Baseline supports smart contracts and tokenization standards, which means key business outputs like purchase orders and receivables could be tokenized and integrated into decentralized finance platforms. For example, businesses could use their account receivables to automatically issue short-term loans in DeFi, similar to factoring in traditional finance.

AMD, ChainLink, Duke University and MakerDAO are some of the members of the protocol’s technical steering committee. The code is available to an early group of testers and will be made public this month.

pTokens to Bring Bitcoin Holders and Liquidity to DeFi

Blockchain oracle provider Provable Things launched pTokens to enable transactions across different blockchains. pTokens allow any cryptocurrency holder to use Ethereum-based decentralized applications, even if they’re not holding Ethereum-based tokens.

This is the latest in a growing number of projects which are trying to make it easier for users to access applications regardless of the tokens they hold, and increase liquidity across blockchains. Ren is another project working on cross-chain transactions, while tBTC created a platform to issue Bitcoin-backed ERC20 Ethereum tokens.

“This aims to unlock the value of the entire $250+ billion cryptocurrency market, letting liquidity flow instantly and fluidly between different blockchains, expanding the world of DeFi,” Provable Things said in a post.

The first pToken available will be pBTC, which is pegged at 1-to-1 with Bitcoin, and provides frictionless access to DeFi for bitcoin holders. BTC holders can instantly convert their tokens to Ethereum-compatible pBTC, and convert them back to BTC.

pBTC will be available on Bancor Network and Kyber Network liquidity pools.

Ether Whales Starting to Accumulate

The top 100 ether holders are once again beginning to accumulate higher percentages of the total token supply, according to Santiment.

“Generally, when this kind of accumulation starts to mount, it’s a signal that those who have the most stake in $ETH (and other respective tokens) are beginning to have a collective sentiment of the token being undervalued and believe it’s a great mid to long-term hold play,” Santiment said in a tweet.

Image source: Santiment

Two Large Crypto Hubs Get Regulatory Breakthroughs

South Korea Approves Crypto-Specific Legislation

South Korean lawmakers passed legislation providing a legal framework for cryptocurrency trading and holding. Korea’s financial regulators will oversee the industry, and cryptocurrency exchanges will need to comply with reporting requirements and have real-name accounts. South Korea is one of the world’s largest cryptocurrency markets and the move signals a change in attitude towards crypto from the country’s regulators, who have previously moved to clamp down on trading.

India Lifts Ban on Crypto Trading

India struck down a two-year-old ban on cryptocurrency trading. The country’s Supreme Court overturned the 2018 ruling by the Reserve Bank of India, which prohibited financial institutions from enabling “any service in relation to virtual currencies,” and caused many crypto exchanges and businesses to shut down. India has remained one of the largest markets for Bitcoin trading, and Indian entrepreneurs continued building blockchain startups —Nuo and Instadapp are two examples in DeFi. The move should fuel even more activity from the country.


The Defiant is a daily newsletter focusing on decentralized finance, a new financial system that’s being built on top of open blockchains. The space is evolving at breakneck speed and revolutionizing tech and money. Sign up to learn more and keep up on the latest, most interesting developments. Subscribers get full access at $10/month or $100/year, while free signups get only part of the content.

Subscribe now

Click here to pay with DAI.There’s a limited amount of OG Memberships at 70 Dai per annual subscription ($100/yr normal price).

About the author: I’m Camila Russo, a financial journalist writing a book on Ethereum with Harper Collins. (Pre-order The Infinite Machine here). I was previously at Bloomberg News in New York, Madrid and Buenos Aires covering markets. I’ve extensively covered crypto and finance, and now I’m diving into DeFi, the intersection of the two.

+20% Yields for Ether Deposits Drawing Users Back to bZx

https://thedefiant.substack.com/p/20-yields-for-ether-deposits-drawing-cb2

Hello Defiers, here’s what’s going on in decentralized finance,

  • Ether deposits in bZx, the platform at the center of recent financial exploits, are surging

  • dYdX introduces tried and tested exchange monetization model: trading fees

  • Instadapp created DeFi Smart Account to provide a single point of entry for open finance

  • PieDAO wants to allow anyone to create and trade passive funds

and more 🙂

You’re receiving this email because you’re a signed up for the free version of The Defiant (thank you!) That means you’re getting an abbreviated version of today’s newsletter. For access to the full content, subscribe now at $10/month, $100/year, or 70 Dai on this link.

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Confidence in bZx Coming Back After Exploits

Users are coming back to bZx, the DeFi platform that was at the center of two exploits about three weeks ago, even as trading hasn’t resumed.

Ether deposits in bZx shot up by more than 20% yesterday to 21.3K ETH, from 17.5K, according to DeFi Pulse. The amount of ether in the platform is still about 22% lower than pre-exploits level. Increased liquidity slashed ether rates by about half, to 27.5% from 41% on the previous day, and from as high as 99% on the day of the first exploit.

dYdX Introduces Trading Fees

DeFi trading platform dYdX is introducing trading fees starting March 10. Taker fees will range between 0.05% and 0.5% of trade volume, depending on trading pair and order size. Market makers will pay no fees, as the platform aims to incentivize liquidity and create a deeper order book.

Instadapp Wants to Provide a Single Point of Entry for DeFi

Instadapp, which built a bridge connecting major DeFi lending protocols, is launching a platform aimed at providing users and developers with a single point of access to all of decentralized finance. Most users interact with DeFi through wallets, which were mainly designed for tokens. Instadapp wants to improve the experience and make it more seamless.

PieDAO Wants to Become DeFi’s ETF Issuer

Another passive investing solution is coming to DeFi. PieDAO wants to enable anyone to trade and create investment portfolios, which can include digital and traditional assets via synthetic assets. These portfolios, called PIEs, will be tokenized and available for trading 24/7 by anyone, globally, and with no minimums.

Top DeFi Apps Reached Almost 6K Daily Active Unique Wallets in Past Week: DappRadar

Top five decentralized finance apps running on Ethereum —MakerDAO, Compound Finance, dYdX, Aave, bZx— have reached almost 6,000 daily active unique wallets in the last 7 days.

DeFi: Dependency Hell Meets Finance: Daniel Que

Coinbase Engineer Daniel Que writes about the risk of decentralized finance composability. “We hear a lot about the magic of composability in DeFi, or “Money Legos.” I want you to remember that it could become “Money House of Cards” in a flash.”

Richard Burton compares ICO days with DeFi days.


The Defiant is a daily newsletter focusing on decentralized finance, a new financial system that’s being built on top of open blockchains. The space is evolving at breakneck speed and revolutionizing tech and money. Sign up to learn more and keep up on the latest, most interesting developments. Subscribers get full access at $10/month or $100/year, while free signups get only part of the content.

Subscribe now

Click here to pay with DAI.There’s a limited amount of OG Memberships at 70 Dai per annual subscription ($100/yr normal price).

About the author: I’m Camila Russo, a financial journalist writing a book on Ethereum with Harper Collins. (Pre-order The Infinite Machine here). I was previously at Bloomberg News in New York, Madrid and Buenos Aires covering markets. I’ve extensively covered crypto and finance, and now I’m diving into DeFi, the intersection of the two.

It’s Complicated: New Attacks Shine Light on DeFi User/Builder Relationship

https://thedefiant.substack.com/p/its-complicated-new-attacks-shine

Hello Defiers! Here’s what’s going on in decentralized finance,

  • A financial attack on the iEarn platform sparks debate on the responsibilities of DeFi users and builders

  • Ren gets closer to delivering cross-chain transactions

  • Insured interest-bearing tokens are coming up

and more 🙂

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Emergencies Complicate DeFi User/Builder Relationship

There was another financial attack to a DeFi platform over the weekend. The scheme resulted in a frenzied community who saw some of the transactions and demanded answers from the project’s founder, and in the resignation of the founder who felt he was the victim of a witch-hunt.

The scheme involved the iEarn platform and three independent traders: 1) the initial schemer, 2) an opportunistic trader who wanted to profit from the imbalances the schemer was creating, 3) a friendly whale who was asked to jump in to fix the mess.

A series of swaps between two stablecoins with the presumably deliberate goal to manipulate the market backfired on the initial schemer and left him down $561,902 because of price slippage. The friendly whale made $420,182 after jumping in, and helped the initial schemer recover some of the losses, which left him down $141,720. The opportunistic trader made $139,957 in the process.

[This is an extremely simplified version of what happened, for a more detailed explanation go to the post mortem by iEearn founder Andre Cronje, and Kerman Kholi’s great posts on the attacks here and here.]

The “Witch Hunt”

The transaction which sparked concern among some DeFi watchers was ironically the one executed by the friendly whale jumping in to rescue the initial schemer from his own attack. With less than a day after the transactions had been executed, Crypto Twitter started demanding an explanation on what was going on, suggesting “something is up” if the team can’t “answer simple questions about people’s money,” and tweeting out alarming and wrong statements, such as one saying the project’s “smart contract has been drained of millions of USD.”

In the meantime, Cronje said in his post mortem of the post mortem that he was busy trying to understand the issue himself (which, if you read the posts referenced above, you’ll see why it could take some time), and also, trying to track down the trader to help minimize losses.

Quitting DeFi

As Twitter mentions piled up, Cronje felt the social pressure was not worth it for a job he had been doing for free and with little help. He announced his departure from DeFi; Building in #DeFi sucks,” the post headline said. In his last update to iEarn, he added slippage protection and disclaimers.

Community Reaction

Some of the most vocal critics, like My Crypto’s Taylor Monahan, said in a post the way to prevent abuse and losses on DeFi shouldn’t be to hurt people, but that users should research and ask questions, and builders should de transparent and answer those questions. Others, like Chris Blec, said in a Twitter thread that while, developers don’t owe the community any answers, they should expect scrutiny as they’re holding millions in users’ money. Still others launched a Gitcoin grant for Cronje to come back and continue working in DeFi, this time for pay.

Should But Can’t

Is it right to expect the same level of response and professionalism from decentralized finance that we get from banks? The answer is we should, but we can’t —for now.

We should because DeFi is supposed to be a better financial system, that’s faster, cheaper, and with more power in the hands of individuals. That includes building platforms which protect users from losing their money and communicating with them when they think they are. Developers are writing code designed to handle people’s money, and they should be held accountable and responsible when it fails.

We can’t because most DeFi platforms simply don’t have the resources to respond as quickly and professionally in an emergency that large financial institutions do, even if they want to.

But because users should get this service, they’ll demand it, and they’re not wrong to do that. There’s a discrepancy in user expectations and projects’ resources, and it will take the space growing and maturing until they’re able to level up.

The rate at which DeFi complexity is increasing is faster than the speed at which projects themselves are growing. This results in traders being able to use and abuse these platforms in mind-blowing ways as funds are pouring in, while the teams behind the platform are still one to a handful of developers trying to keep it together.

Communication Helps Every Relationship

Users should be aware the space is in its very early days and most companies building it aren’t mega-corporations with a help desk available 24/7 and these markets don’t have billions in liquidity and insured funds. That means: research the platforms you’re using, don’t risk more money than what you’re willing to lose, do ask questions, and don’t make unfounded accusations or personal attacks.

Builders of DeFi platforms should expect scrutiny. The best policy is transparency from before the user deposits funds, with proper risk disclosures, to after their funds have been deposited, alerting them when there’s something wrong and disclosing what’s being done about it.

The iEarn and bZx attacks both showed that there’s a complicated balance between speed and accuracy. Trying to immediately answer to the community’s questions and quickly fix damage increases the risk of messing up, while taking the time to give the right questions and make the right fixes can make users nervous. The best way to ease users’ tensions is to clearly communicate the steps being taken.

And lastly —add slippage protection!

Ren Wants to Connect Non-Ethereum Assets to DeFi

Ren announced an alliance of projects helping secure, develop, and use the project’s RenVM system, which has the goal of enabling transfers across different blockchains. The initial members include Aave, AirSwap, Authereum, bZx, and DeFiZap. These projects will integrate assets linked to non Ethereum-based coins such as renBTC and renZEC. The project still hasn’t been released on mainnet.

“Bringing cross-chain assets to Ethereum will expand the utility of DeFi by introducing larger collateral types into the ecosystem.” 

Developers Build First Insured Interest-Bearing Dai Token

As of today, there are plenty of tokens that automatically earn interest. Separately, there are ways to protect against the loss of those tokens. A group of developers want to wrap those things together. saveDai is an Ethereum-based ERC20 token, which earns interest from Compound Finance and is secured via Opyn’s hedging options. The project is still in the works.

A Loan Against Virtual Real Estate Was Just Issued

Someone was able to take tokens representing unique plots of land in a virtual world, and use them to take out a loan denominated in MakerDAO’s Dai stablecoin, in what’s probably the first ever transaction of its kind. Rocket, a non-fungible token based lending platform, announced it issued a loan of 20,000 Dai backed by about $100,000 of virtual real estate on Decentraland. The 6-month loan has an annual interest of 12 percent.

[Correct from previous version which said loan was backed by $10,000 of virtual land]

ProgPoW, The Ethereum Community Speaks: Hudson Jameson

Hudson Jameson, who helps run the Ethereum core developer meetings, wrote a detailed post on the history of the change to the Ethereum mining algorithm known as ProgPow, and his personal opinion on the latest controversy. “In my opinion, ProgPoW isn’t worth it and is dead based on overwhelming evidence of community dissent.”

Bitcoin on Ethereum DeFi is about to surpass Bitcoin on Bitcoin DeFi.


The Defiant is a daily newsletter focusing on decentralized finance, a new financial system that’s being built on top of open blockchains. The space is evolving at breakneck speed and revolutionizing tech and money. Sign up to learn more and keep up on the latest, most interesting developments. Subscribers get full access at $10/month or $100/year, while free signups get only part of the content.

Subscribe now

Click here to pay with DAI.There’s a limited amount of OG Memberships at 70 Dai per annual subscription ($100/yr normal price).

About the author: I’m Camila Russo, a financial journalist writing a book on Ethereum with Harper Collins. (Pre-order The Infinite Machine here). I was previously at Bloomberg News in New York, Madrid and Buenos Aires covering markets. I’ve extensively covered crypto and finance, and now I’m diving into DeFi, the intersection of the two.

Compound’s New Governance Token Helps Platform Coins Further Shed Stigma

https://thedefiant.substack.com/p/compounds-new-governance-token-helps-f10

Hello Defiers and happy Friday. Here’s what’s going on in decentralized finance:

  • Compound Finance is introducing a governance token

  • Bullish signs in DeFi amid crypto market slump

  • PoolTogether tokenizes tickets

  • Loopring launches scalable DEX

and more 🙂

You’re receiving this email because you’re a signed up for the free version of The Defiant (thank you!) That means you’re getting an abbreviated version of today’s newsletter. For access to the full content, subscribe now at $10/month, $100/year, or 70 Dai on this link.

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Token Democracy Bringing Platform-Specific Coins Back

Compound Finance wants to decentralized governance by introducing a token to its system. The plan shows platform-specific coins are losing their stigma and becoming more sophisticated.

Compound Finance, the second-largest lending platform in DeFi after MakerDAO, is planning to distribute tokens among Compound shareholders in proportion to their stakes —initially, the coins won’t be available to the public. The goal will be for the coins, called COMP, to help management cede control of the protocol to the broader community.

In this new financial system, something as radical as a company’s management team democratizing decision making, has come to be one of the basic features expected of these companies. Any direct control or influence over code and governance is reviled. And that’s because it defeats the whole purpose of DeFi and Web3, which is to be trustless. That means users don’t have to trust banks and processors in the middle of transactions, and they don’t have to trust the teams building these dapps either.

Right now, Compound is further from the most decentralized extreme of the spectrum relative to other projects like Uniswap and MakerDAO, as its team can unilaterally change how the project works, and its code is not open source. A governance token would be a big step towards the more decentralized end of the spectrum.

Token Democracy

There are variations of these so-called governance tokens, but the general concept is that they each represent one vote (1 token = 1 vote, not 1 person = 1 vote). That’s because in systems where people are represented by crypto addresses, identity is easily manipulated — as easy as creating a new crypto address. MakerDAO, 0x and Aragon are already using their platforms’ own tokens for governance. Kyber Network and Synthetix are also moving in this direction. [Read The Defiant’s post about it: Synthetix and Kyber Are Latest to Join DAO Wave].

Besides carrying voting rights, governance tokens often carry other benefits and are used for things besides voting. In the case of MakerDAO, MKR tokens get burned when they’re used to pay fees required to close out a loan on the system. This could be seen as an indirect dividend, as each time MKR is burned, the price is pushed up.

Not an Investment

This is a lot more sophisticated and nuanced than most of the so-called “utility tokens” of the ICO days. Projects introducing a token whose only function is to simply buy goods and services offered on the dapp are becoming less frequent, as it became apparent there was no real use for those coins, other than to sell them for ether and bitcoin. The market has caught on and the bar for projects that want to add a token is a lot higher.

Compound’s token will be used solely for its governance function and is not meant to be an investment, the company’s CEO Robert Leshner wrote in a post.

“It isn’t a fundraising device or investment opportunity. Until the decentralization process is complete, COMP will not be available to the public.”

Here’s how it works:

  • COMP, an ERC20 token, allows the owner to vote or to delegate voting rights to the address of their choice, meaning it’s not necessary to own COMP tokens to participate in governance.

  • Anybody who owns or has at least 1 percent of COMP delegated to their address can propose a governance action.

  • Proposals, which are meant to be executable code, are subject to a a three-day voting period. If the majority of votes and a 4 percent quorum approve a proposal, it can be implemented after 2 days.

Leshner declined to provide more details than what was disclosed in the post.

The two-day buffer before a proposal is implemented may be a lesson from the potential attack discovered on MakerDAO’s governance system, which would allow anyone with enough MKR tokens to create a proposal and vote to steal funds, without giving other token holders to react. This vulnerability pushed the Maker team to change the buffer time before votes are executed from 0 to 24 hours.

Tokens used to be mainly a tool for teams to raise money before delivering their product, causing a complete misalignment of incentives. It’s a positive development that in this new wave of Ethereum-based applications, tokens have the specific function of aligning the project with the community, by becoming a tool to vote.

DeFi Shows Improving Sentiment Amid Crypto Slump

Ether bulls are getting whiplashed. Last week, ETH crossed $280 and $300 was in the horizon. This week, Ethereum’s cryptocurrency has slumped 20 percent from those highs to a little over $220, causing liquidations on decentralized finance to spike and value locked to drop. But there are signs that traders are regaining confidence.

PoolTogether is Tokenizing Lottery Tickets

Users can now buy tokens to participate in the PoolTogether lottery. The protocol’s new plDAI and plUSD tokens represent ownership of tickets eligible to win prizes, and can be stored in users’ wallets and transferred to others.

Loopring Launches First zkRollup Exchange

Loopring, a protocol for scalable Ethereum exchanges, islaunching the Loopring Exchange on Ethereum mainnet. It’s the first publicly accessible exchange using the zkRollup technology.

Actor Steven Seagal Fined by SEC for Touting Token Offering: Bloomberg

Seagal was promised $250,000 in cash and $750,000 worth of tokens for touting an initial coin offering from a company called Bitcoiin2Gen. He agreed to settle the SEC’s allegations without admitting or denying wrongdoing, and will pay a $157,000 fine and the same amount in disgorgement.

Why Flash Attacks will be the New Normal: Haseeb Qureshi

Haseeb Qureshi of Dragonfly Capital says, flash loans are a big security threat, but they’re here to stay, “and we need to think carefully about the impact they will have for DeFi security going forward.”

Rocket announces it issued a loan backed by tokenized art.


The Defiant is a daily newsletter focusing on decentralized finance, a new financial system that’s being built on top of open blockchains. The space is evolving at breakneck speed and revolutionizing tech and money. Sign up to learn more and keep up on the latest, most interesting developments. Subscribers get full access at $10/month or $100/year, while free signups get only part of the content.

Subscribe now

Click here to pay with DAI.There’s a limited amount of OG Memberships at 70 Dai per annual subscription ($100/yr normal price).

About the author: I’m Camila Russo, a financial journalist writing a book on Ethereum with Harper Collins. (Pre-order The Infinite Machine here). I was previously at Bloomberg News in New York, Madrid and Buenos Aires covering markets. I’ve extensively covered crypto and finance, and now I’m diving into DeFi, the intersection of the two.