Bitcoin & Tether and DeFi’s Next Growth Drivers

DeFi has grown considerably in 2020, to say the least. It’s been 3 months since the launch of COMP set off a never-ending stream of farms, forks, crashes and heists. The growth in the space has been hard to keep track of with new launches weekly, as is calculating market sizing with asset rehypothecation through the system.

Roughly speaking, the DeFi market has at least 6x’ed in the past 3 months with DeFi Pulse’s latest industry TVL at $9.1bn USD – up from $1.27bn the day before COMP launch.

While some of this increase is from asset appreciation, not all of the growth can be attributed to Twitter’s speculative echo chamber. New assets and investors have poured into the space, increasing usage of DeFi platforms and the amount of collateral and liquidity supplied.

At the beginning of the year, I said that Bitcoin and Tether were the two most important assets to DeFi growth in 2020. Yield farming has been the catalyst, but BTC and USDT inflows have been the largest source of fresh capital.

Tether has long dominated the centralized world but had little presence in DeFi, where Dai and USDC proliferated, but in the last three months, USDT usage in DeFi has exploded with almost $900m locked up on-chain. Tether’s DeFi journey was jumpstarted by Compound, hundreds of millions of USDT flowed into Compound after it approved USDT borrowing and made Tether the crop of choice to farm COMP.

Tether moved on from Compound but stayed in DeFi and now has a larger presence than Dai and competing with USDC.

The DeFi inflows were from Tether’s base in Asia and its prevalence amongst traders – both segments hopped on the yield farming hayride in full force over the summer. With the further gamification of DeFi, Tether could see increased usage in the degenerate gambling space, if sUSD doesn’t beat it there.

In addition to Tether, Bitcoin synthetics have been the other asset with strong organic inflows into DeFi. It remains most useful as another source of collateral, and Bitcoiners are perhaps the most hospitable market because so many are already using it as collateral to take out loans in the centralized world.

The Bitcoin on Ethereum market has also exploded, growing from $45m in mid-June to almost $1bn in synthetic BTC today. WBTC, a custodied BTC wrapper, is the largest with renBTC providing the first non-KYC’d bridge for Bitcoin to Ethereum.

Amidst the summer’s farming craze, a consistent flow of Bitcoin has flowed onto Ethereum. About half of it is used as collateral for on-chain loans, while most of the rest is farming CRV. Synthetix’s sBTC and Huobi’s hBTC have tried to attract investors with attractive farming yields, but they have not gotten much liquidity outside of subsidized pools.

CREAM, a Compound fork, accepts renBTC as collateral but has only $3m in renBTC deposits. WBTC is far ahead on the BTC as collateral in DeFi – largely in Aave and Maker.

Altogether, almost $1.5bn of Tether and synthetic Bitcoin has flowed into DeFi over the last 3 months. Looking forward, Bitcoin and Tether still has room to grow in DeFi and should remain top targets for any DeFi product.

Investors: new players for DeFi games

Tether and Bitcoin powered the organic inflows that drove the farming craze and new value creation from token launches, but who was driving these flows? And who are the next group to fall under the DeFi spell

The DeFi Curious. Something clicked in May and June. Perhaps it was the quarantine, Balancer and Uniswap v2 launch, the efficiency of Curve, or the COMP distribution, but DeFi started appearing outside of core DeFi fanatics and creeped into adjacent crypto communities.

DeFi has an obvious appeal to the crypto trader crowd. Bitmex CEO Arthur Hayes loves $YFI but is also willing to jump on whatever new food coin emerges. Three Arrows Capital is a more buttoned-up outfit that has gone heavy into DeFi – and quite successfully. And of course, perhaps no one has gone more DeFi than FTX CEO and SushiSwap maestro Sam Bankman-Fried. Luckily for him, the DeFi label is self-applied.

The counterpart to the crypto trader is the crypto VC. VCs are not exactly new to DeFi, but activity has increased and their role has moved on-chain with the rise of fair launches. There is a growing rivalry between VCs and traders centered on DeFi – is it a consumer product with network effects or a complex financial instrument (why not both? Gauntlet CEO Tarun Chitra said it was “reminiscent of the previous talent ‘war’ between HFT and online ads”.

The Crypto Center. If the DeFi Curious hope to get in on a rocket ship taking off, the Crypto Center pride themselves on driving the crypto topic du jour. The most obvious place to start is Laura Shin’s Unchained Podcast. The last three podcasts have been DeFi-focused, featuring Yearn.Finance’s Andre Cronje, Polychain’s Olaf Carlson-Wee and a joint appearance with Dragonfly’s Haseeb Qureshi and Paradigm’s Dan Robinson.

Epicenter, a more technical podcast, has featured a DeFi-heavy lineup throughout 2020, including episdodes on Aave, Opyn, Nexus Mutual, UMA, Balancer and Loopring.

And of course, no one represents the Crypto Center like Mike Dudas, founder of the Block. Dudas has gone full DeFi degen, months after begrudgingly allocating some of his precious BTC into ETH. Just this weekend, he tweeted, “DeFi is the most interest thing happening in cryptocurrency and digital assets today”. The link is presumably broken since Dudas auto-deletes his tweets.

Who’s Next?

To be clear, there is still ample room for DeFi growth from these existing crypto communities – just as Bitcoin and Tether remain attractive targets for DeFi projects, but the question is who catches the DeFi bug next and what will they bring? A couple groups:

  • Fintech – Dudas also has a foot in what could be an adjacent source of talent, capital and compliance. The decade life cycle of fintech is coming to an end with big exits and companies with large user-bases. Some of the venture funding chasing fintech could shift over to DeFi, but the bigger opportunity is DeFi integrations with existing, popular consumer products. Robinhood and the Cash App allow easy BTC & ETH purchases, but one of the large fintech’s could integrate Compound or allow easy Uniswap/Balancer liquidity provisioning.

  • Wall Street – Wall Street is slowly embracing an institutional approach to Bitcoin, and presumably ETH is next, but traditional financial institutions seem far away from building and using blockchain-based financial products and services, outside of hodling. Still, Wall St traders could become a strong source of flow from their personal capital and institutions will make venture and equity investments. The one area to watch is the on-chain derivative space. There is a lot of interest and experimentation now, but it could benefit from outside expertise (or directed investor flow)

  • Gaming (and sports) – Perhaps this distinction is moot now because so much of DeFi has been gamified (is this a financial product?) but DeFi protocols could find inflows from a larger, entertainment-first mainstream audience. Sports are the most popular way to gamble; maybe prediction markets can see this flow. Perhaps growth from such a market is dependent on layer 2 scaling and lower transaction costs.

  • Geographies – DeFi’s promise is a digitally native, globally accessible financial system, but adoption is likely to occur country by country. Tether, of course, is primarily an Asian phenomenon, as is all of the DeFi Curious (Arthur Hayes, Sam Bankman-Fried, Three Arrows Capital). Country-level restrictions could drive larger flows into DeFi, or alternatively, a central bank digital currency could create an easy on-ramp into the DeFi world. Given the infrastructure already in place, any project with a local banking relationship and fiat on-ramp, could reach scale through the retail market. No-loss lottery PoolTogether’s largest market is reportedly Indonesia.

Chart of the Week: DAI > MKR

Beautiful, if depressing chart from Dai supply has shot up over the last few months, almost entirely due to the yield farming craze, where Dai is crop of choice – on Compound at least – because it has the least overhang over borrows. Maker has onboarded new collateral types and raised debt ceilings to deal with the strong Dai demand. Unfortunately, MKR has not been able to participate in that growth. With fees at 0 since March, no MKR has been burned, despite the fact that MKR’s risk profile goes up with the supply of Dai, since it’s the ultimate backstop in the event of default. Dai demand remains strong as does its integration into DeFi, but the larger concern is teams building now for USDC and Tether, eroding Dai’s “DeFi’s default stablecoin” status. With another price rise in Dai over the last week, there is currently an on-chain poll for a “Quantitative Easing” initiative, while there is a renewed push to onboard real world assets as collateral. In a Maker forum poll, 56% estimated 200-500m more Dai will need to be printed to meet current demand; 21% said 700m-1bn.

Tweet of the Week:

Perpetual Protocol launched PERP last week using a Balancer Liquidity Bootsrapping Pool (LBP), becoming the first to use the token distribution method. LBPs automatically adjust the weight between a new token and a listing token, in this case PERP and USDC. At launch, the weight is set at 90/10 PERP/USDC, creating a very high price and then automatically adjusts the weight down to deter front-running and whales. Parsec Finance founder Will Sheehan approves, arguing that it creates a smoother price discovery. Market cap does seem a bit high still ($255m), and it appears to have raised $8.5m? Curious as to why USDC and not USDT as Perpetual Protocol is backed by top trading firms (2/3 of DeFi Curious).

Odds and Ends

  • DeFi Pulse and Set team up to launch DeFi Pulse Index (DPI) Link

  • Hacker drains $8.5m out of BZX again (and returns it?) Link

  • Gitcoin Matching Grants Round 7 is live Link

  • YAM replanting and launch Link

  • Grand opening of SushiSwap Link

  • Hegic Launches Initial Bonding Curve Offering Link

Thoughts and Prognostications

That’s it! Feedback appreciated. Just hit reply. Written in Brooklyn, where I’m kind of excited for fall. Long-ish post to distract from the daily farms. May switch to Tuesday delivery :-/

Dose of DeFi is written by Chris Powers. Opinions expressed are my own. I spend most of my time contributing to DXdao. All content is for informational purposes and is not intended as investment advice.

The New Breed of DeFi Products

Retail savings accounts were the smart money’s bet as to what could lead to a 10x growth in DeFi activity. Of course, that prophecy has failed to come true.

Building mass market products is hard and expensive, and DeFi interest rates have returned to earth and are only marginally higher than the traditional world. “New” users to DeFi have not come yet.

Instead, the most promising DeFi strategies in 2020 are targeting large, existing crypto traders and investors. The past week has seen four major developments that could further open up the DeFi institutional space, namely

  1. Growth of WBTC in Maker
  2. The rise of Layer 2 DEXs
  3. dYdX’s BTC-USDC perpetual swap
  4. UMA’s ETHBTC priceless synthetic token.

WBTC now backs 8% of all Dai

In just two weeks, the total amount of BTC locked in WBTC has tripled to 3,800 BTC or $35m. CoinList’s addition of WBTC certainly helped, but the real catalyst for the growth was the addition of WBTC as collateral in MakerDAO – over 68% of all WBTC is now locked in Maker.

The size of the BTC market dwarfs DeFi and the growth of WBTC seems to be from a few large, longtime BTC holders. The 1000 WBTC mint on May 11 was likely from crypto lender, Nexo Finance, which then proceeded to lock WBTC and mint Dai. Why? Alex Svanevik explains:

Currently Nexo charges (at least) 5.9% APR in interests on a loan from their platform. But the fee to borrow DAI against WBTC on Maker is only 1%. In other words, they could pocket a marginal spread of at least 4.9% by lending out the DAI. Alternatively, they could sell the DAI and then lend out USD for it instead — trusting that the DAI peg will hold.

The appeal to Nexo and any other BTC holder is clear. BTC-backed loans are big business and Maker is expanding the DeFi lending addressable market. It doesn’t appear to be slowing down:

This 4 million Dai mint also appears to be Nexo Finance. Maker is now approaching its $10m debt ceiling for WBTC. Rune’s last point show’s the versatility of DeFi, but there will need to be more varied products and services.

Layer 2 DEXs offer a new growth area

Almost all of the major developments so far in the DeFi DEX space have revolved around liquidity pools. Kyber and Uniswap (along with Bancor) pioneered the automated market maker (AMM) space, while the other big development of the DEX space over the last year has been the rise of DEX aggregators, like 1inch, DEX.AG or 0x’s Liquidity API.

Rising gas prices and more sophisticated traders are pushing more investors to Layer 2 solutions, which are finally exiting the theoretical phase. IDEX and Synthetix have unveiled Layer 2 demos, while Loopring is live on Ethereum mainnet and benefiting from frustrations over high gas prices.

Layer 2 sacrifices composability for transaction speed, so while there may be growth in DEX volume, it may not have DeFi spillover effects like liquidity. In fact, they may resemble centralized exchanges:

The good news for DeFi is this would represent a new growth segment: sophisticated traders.

dYdX’s BTC-USDC perpetual

dYdX managed to grow over the last year even though it employed a traditional order book, because it focused on margin trading, a limited number of trade pairs and was conducive to professional traders, allowing free cancelled orders and covering the cost of gas.

Bitmex’s perpetual swap is the most popular product in crypto, so the launch of dYdX’s BTC-USDC perpetual is big news for DeFi. It saw more than $10m on a single day and has done almost $25m in volume since launch. It has also significantly increased its average trade size:

ht – Brock Elmore and Our Network

Two additional thoughts:

  • USDC – USDT (Tether) has seen market cap explode in 2020, but it is also integrating itself directly into financial products. Increasingly, BTC futures are being quoted and settled in USDT. A USDC option should be a welcome diversification by the market, and good news for USDC, which has grown slower in 2020 compared to other stablecoins.
  • Funding rate – Perpetual swaps have no expiry date, but need to keep rebalancing the overall position of the platform. So it will pay shorts if it is heavily long and vice versa. The funding rate (currently 0.022%) pays out every 8 hours, so if it’s positive shorts get paid that percentage of their position, while longs get compensated if its negative. This is a new product in DeFi and could attract additional flows for those wanting to get paid to be short or long Bitcoin. It also could spawn other money legos that plug into the dYdX perpetual.

UMA’s ETHBTC token

UMA released its first product last week: a synthetic token that tracks the ETH/BTC price. Unlike the perpetual contract, this does have an expiry of August 1.

As UMA’s name (Universal Market Access) indicates, synthetic tokens like ETHBTC will be retail oriented products, but they need large investors on both sides of the trade to collateralize the product (at least for now). UMA’s synthetic tokens need a long and a short; investors can enjoy a premium by collateralizing & minting new synthetic tokens and then selling them.

Like dYdX’s perpetual contract funding rate and WBTC-backed loans on Maker, UMA can grow by attracting and incentivizing investors with existing positions that can be more capital efficient in a DeFi-enabled world.

Chart of the Week: DEX market share

Well-done chart from the newly launched Formal Verification newsletter. Uniswap is the clear leader, but the space is still in flux. Curve’s growth demonstrates that innovative designs can work for specific assets. Kyber has had consistent volume but it does not appear to have done better than the industry March – May. Smaller traders may have been turned off by high gas prices.

Tweet of the Week: DEX market share of CEX

It’s small, but growing. Not a lot more to add. It should be noted that volumes on centralized exchanges were nearing all-time highs in March/April, so the growth of DEXs during that period is especially strong.

Odds and Ends

  • All 118 projects of ETHGlobal’s HackMoney Showcase Link
  • Ponzis and marketing schemes are ETH’s biggest gas guzzlers Link
  • RenBTC quietly goes live on Ethereum mainnet Link
  • How Dai became a favorite in Latin America Link
  • tBTC: Details on May 18 pause Link Update on tBTC launch Link
  • Synthetix finishes trial for Ether as collateral Link
  • Maker raises USDC stability fee to 0.75% Link

Thoughts and Prognostications

That’s it! Feedback appreciated. Just hit reply. Happy Memorial Day! Written in Brooklyn (again). Don’t forget to subscribe to Govern This. Time for euchre?

Dose of DeFi is written by Chris Powers. Opinions expressed are my own. All content is for informational purposes and is not intended as investment advice.

DeFi vs. Crypto Dollars

Check out Friday’s edition of Govern This on community signals in governance, potential changes to Maker’s stability fee, and other governing things. Read and subscribe here.

DeFi has been the most influential meme of the last year or two in the blockchain/crypto space. It is easy to explain to the crypto generalist and captured the essence of already existing projects with a catchy name.

Memes create virtuous feedback loops. A name enables people to start talking and writing  ( 🤔) about DeFi, which then leads to more users and then more developers building applications. New projects allow for new content that kicks off a cycle of sustainable growth. Attracting new users is easy because of the simple-to-understand name, which also acts as a cohesive gel to a community and industry.

What is a stablecoin?

“Stablecoins” have been the most successful product of the last year or two in the blockchain/crypto space. Initially, stablecoins were not intended to be pegged to an asset (say, the US Dollar) but just stable in the sense that it had low price volatility, like the original Maker design, which was not pegged to the dollar.

Bitshares launched a synthetic USD stablecoin in 2016, followed by Bitfinex’s launch of the fiat-backed Tether on Bitcoin’s Omni network in 2017. For most of 2017, “stablecoin” was synonymous with “Tether” which was synonymous with “sketchy”.  

Then, in 2018 a flurry of centralized and decentralized stablecoins announced plans to launch; most of the decentralized ones never materialized, but several major exchanges now have successful stablecoins, along with TrueUSD, PAX, and of course, Dai.

Their growth continued unabated in 2019 and was pushed into overdrive with the market crash in March and the scramble for (any) dollars.

Crypto dollars

Over the last few months, stablecoins have gotten the attention of financial regulators and government-backed digital currencies have broadened imaginations on the scope and possibilities of “stablecoins”, which also may have led to proliferation of the use of the term “crypto dollar” instead of stablecoin. It seems more accurate and easier-to-understand for new entrants.

The question is, how will the use of “crypto dollars” as a meme affect crypto dollars as a product and DeFi as an industry (and meme). It has a further potential reach than stablecoins and a more diverse set of participants than DeFi – all major crypto exchanges itching for seignorage and every base-layer blockchain aiming to be the settlement layer.

Then, of course, new entrants and use cases of crypto dollars from the virtuous meme development cycle and the world’s demand for the US Dollar. What happens when crypto dollars go from $10bn to $100bn? Will non-crypto investors trade crypto dollars? Or will crypto dollars expand beyond trading into retail and non-trading use cases?

And perhaps most interestingly, how much of “crypto dollars” will be in DeFi?

Go further:

Chart of the Week: DeFi’s biggest tokens reflecting a shakeup in the largest DeFi tokens, thanks to the rocket ship ride of $ZRX (0x) the past few days. It’s unclear why the token pumped, but it’s still up 70% over the last week even after a correction + a broad market downturn. DeFiMarketCap includes tokens not in circulation, hence why MKR is still ahead on CoinMarketCap and it doesn’t include LINK. Also, MKR is still recovering from losses thanks to Black Thursday fall out. The 5 largest “DeFi” tokens, however, are all above $100m market cap and relatively well-diversified cross lending, exchanges and Oracles.

Tweet of the Week: Liquidity all the way down

There are two battles masquerading as one. One is a battle between DEXs and lending protocol for underlying liquidity, and the second is a battle amongst wallets and front-ends for users. In the future, these paths will bifurcate and we are not likely to see “one super fluid protocol”. There will be liquidity aggregators that sit in between, which we’ve already seen, of course, with 1.inch, DEX.AG, Paraswap for DEXs and on the lending side, Idle Finance, iearn, RAY and even Curve.Fi to an extent.

Odds and Ends

  • RadarRelay relaunches, focuses on mobile and integrates more liquidity sources Link

  • Synthetix partners with Optimism to launch Layer 2 demo Link

  • Strike: Decentralized Perpetual Swaps for Every Asset Link

  • Paradigm-backed Yield hopes to bring fixed-rate borrowing to DeFi Link

  • Link

  • 10 things to watch at Consensus Distributed Link

  •’s DeFi user survey Link

  • Kyber Ecosystem Report #14 Link

Thoughts and Prognostications

That’s it! Feedback appreciated. Just hit reply. Written in Brooklyn (again). Happy Halving Day! Bitcoin is cool too. Don’t forget to subscribe to Govern This. Ready for euchre now.

Dose of DeFi is written by Chris Powers. Opinions expressed are my own. All content is for informational purposes and is not intended as investment advice.

Maker’s Quest to Defend the Peg

ICYMI: Check out Friday’s edition of Govern This, which dives into Synthetix’s effort to rebalance its debt portfolio, UMA’s token holders’ voting responsibilities and MakerDAO’s busy week of governance. Read and subscribe here.

By any means necessary

Central banks enter a crisis with a limited set of tools at their disposal, but as it persists, they are forced to improvise to provide more support. Prior to 2008, the Fed’s primary monetary policy lever was the Fed funds rate, but Bernanke and co. pulled on that lever early and set rates to 0.

Only as the crisis continued did the Fed look for other ways to support credit markets and bring out the bazooka with Quantitative Easing. This year, Powell exhausted the Bernanke playbook within the first weeks of the Covid-19 crisis and is now exploring more direct buying of corporate bonds, not to mention providing a backstop for a bunch of loans extended by Treasury.

MakerDAO is encountering its first major liquidity crisis, stemming from the event of Black Thursday on March 12, with Dai trading at a 1-5% premium.

In the immediate days after, the Maker community decided to onboard USDC as collateral, which helped bring the Dai price down, but more importantly, injected additional liquidity for the MKR flop auction to recapitalize the Maker system after the losses from 0 Dai bid collateral auctions on Black Thursday.

But still Dai traded at a premium for all of April:

Chart from, using the invaluable data from

Over the last few weeks, one could argue that Dai has been stable, trading at $1.015, but parity with the US Dollar is more important to Maker’s expansion plans for Dai than stability. The community – also known as large MKR holders – wanted more action. And last week, MakerDAO moved forward with two new tools to help restore the peg:

  1. Add WBTC as collateral

  2. Lower the USDC stability fee from 6% to 0%

The addition of USDC as collateral was supposed to be a panacea because it “closed” arbitrage cycles and gave access to real dollars.

Hasu wrote about the problem of arbitraging Dai in January 2019:

When market demand pushes the price of DAI to $1.02, you can again take $1.00 USD, buy $1.00 ETH (or any other asset that can be used as collateral) and lock it in a CDP. The problem, however, is that for each $1.00 ETH locked up, Maker will give you less than $1 of Dai. That is due to the requirement for over-collateralization. The current collateralization ratio is 150%, so $1.00 ETH in a CDP can generate up to 0.66 Dai (this ratio could change, but it’s never going to be close to 100%).

Now you can certainly sell the 0.66 Dai at the same 2% premium, but you still have the original ETH locked up. The fundamental difference between “arbing” Tether and “arbing” Dai is that with Dai you also need to look for a profitable way to exit the collateralized debt position at a later date. And it’s only going to be profitable if you manage to buy back the Dai for less than you sold it for.

With the addition of USDC as collateral in Mid-March, arbitrageurs no longer need to purchase ETH to get Dai to sell, but it remains capital inefficient as the 120% collateralization rate prevents you from minting as much Dai as you deposit USDC.

That means you are forced to take on Dai debt and must wait until the peg returns to parity to pay it back to realize profits. When USDC was first added, it came with a 20% stability fee and then MKR holders lowered it to 6% before slashing rates to 0 with the latest executive vote over the weekend.

With 0% interest rates, Maker has slashed the financing costs of arbing real USD into their system. Traders just need to hold Dai debt, cross their fingers and wait for the peg to return.

The other big move was the addition of WBTC as collateral, which launched on May 4 with a 1% stability fee and a 150% collateralization ratio. I discussed the implications of WBTC as collateral last week, and although the inclusion has felt inevitable, there was strong pushback to the acceptance of a “centralized custodian” in the Maker ecosystem.

Bitcoin has always been apart of Maker’s growth roadmap, especially given the huge market for Bitcoin-backed loans, but the choice of WBTC as the BTC synthetic of choice is because Dai’s drifting peg forced Maker to act now and WBTC is the only option with close to enough liquidity.

89% ETH

There has not been a flood of WBTC into Maker. As of writing, $76,000 Dai has been minted using WBTC, compared to $433k from BAT, $11.8m from USDC and the remaining $99m from ETH collateral (all from You can now safely call it “Multi-Collateral” Dai.

The question is how much the pushback from the community will matter, and whether other Ethereum-based BTC loans can overcome Maker/WBTC’s head start. The measures have helped (a little); as of writing, Dai is trading at $1.007 on dYdX and Coinbase Pro.

UMA and Bootstrapping Liquidity

UMA’s initial Uniswap listing gave flashbacks to 2017 ICO craze. With all the lending and trading development in DeFi, lest we forget how innovative new capital formation tools – like the ICO – can be.

The sale did not yield immediate widespread distribution; only 291 addresses hold UMA tokens. In terms of price, the listing was a success. The token was listed at $0.26 but the first buys sent the price to over $2.00 before settling in the $1.25 range now, or 5x their listing price.

There was also some controversy on access to the listing. Yes, Uniswap is an open platform, but the initial seed round token price was only available to sophisticated traders with lots of capital. Gnosis’s Martin Köppelmann had the best Twitter thread explainer of the dynamics of using an automated market maker (AMM) for a token auction and Reuben Bramanathan had another good one with key takeaways.

The Uniswap listing was cheaper than using an orderbook exchange and a market maker, but it still requires a good chunk of ETH – UMA needed to put more than $500k into the pool to list 2% of its tokens.

Some suggested that a listing could be done more efficiently on Balancer, pointing to a post last month by its co-founder Mike McDonald about “Bootstrapping Liquidity Pools”. Whereas in Uniswap, pools must be 50/50 in the listing token and ETH (or another token in Uniswap v2), Balancer pools can have any preset allocation of two or more tokens that it automatically rebalances to.

A team could set an initial price with a weight of 20% ETH 80% new token, which would be more capital efficient, and then set the rates of the Balancer pool to change over time, in order to slowly build liquidity. McDonald says that projects can define the token weights with an exponential curve that adjusts the weights down after launch, which “drops the value of the token in the pool [and] discourages an eventual price spike due to early speculation.”

Chart of the week: DeFi users

Another Dune chart, this one is part of a post from 1confirmation’s Richard Chen into how many DeFi users there are – 150,000 according to the analysis. The post is a reminder that TVL is heavily skewed towards lending platforms. Outside of Dai holders, Uniswap and Kyber have the highest number of users, boasting more than 50k each. And while there has been strong growth over the last year, the market is still tiny. All charts will update on the Dune Analytics page.

Tweet of the Week:

Keeping it spicy. Despite previously giving a Shermanesque statement that Compound would never launch its own stablecoin, Compound Founder Robert Leshner opens the door just a little bit to the idea, as long as the community leads it. It’s not that surprising with stablecoins passing $10bn in circulation last month and DeFi’s most celebrated stablecoin off the peg with a tough PR week.

Odds and Ends

  • Bancor announces v2, integration with Chain link, Q2 launch Link

  • DeFiZap and DeFiSnap combine to form Zapper Link

  • SAFG aims to be new framework for investing in DeFi protocols Link

  • Instadapp launches DeFi Smart Accounts Link

  • Liquity is a new borrowing pool with 110% collateralization ratio Link

  • Buidling with Opyn options Link

  • DeFi Italy team launches Synthetix portfolio tracker Link

  • Layer 2 DEX Loopring April update Link

Thoughts and Prognostications

That’s it! Feedback appreciated. Just hit reply. Written in Brooklyn (again), where the past two days have been top 10 weather days of the year. Don’t forget to subscribe to Govern This.

Dose of DeFi is written by Chris Powers. Opinions expressed are my own. All content is for informational purposes and is not intended as investment advice.

MakerDAO governance leaves the foundation

On Saturday, crypto fund ParaFi Capital posted a 900-word piece on Maker’s online governance forum entitled [Action Required] State of the Peg. The post argues that Dai is in a “perilous and dislocated state at $1.02-1.03” that demands “emergency action” outside of the newly implemented MIP process.

We discussed why Dai is trading above its peg last week, but the campaign to return it to $1.00 picked up considerable steam over the weekend with several prominent DeFi voices replying in agreement with ParaFi Capital, including Scott Lewis at DeFi Pulse/DEX.AG and Tom Schmidt at Dragonfly Capital, a major MKR holder.

While a 2% premium may seem small, Tom Schmidt explains how that can make a big difference:

“We’re (anecdotally) speaking with a few teams that are considering switching to USDC away from Dai, and we see this switch already happening through on-chain data. dYdX posted its first day 1 with more USDC-WETH volume than DAI-WETH volume last week. Currencies, even fully-backed ones like Dai, still rely on network effects and strong narratives, which can often unwind just as quickly as they grew.

With this in mind, it’s important to think about the problem itself, which is that ~6-10MM more Dai needs to be minted in order to re-peg. So, where is this going to come from?”

The Maker forums are typically populated by the Maker team and core members of the community; most attend Maker’s weekly Governance and Risk meetings on Zoom. Some in the community reacted defensively, diminishing the seriousness of the situation. They argued macro volatility justified the drift from the peg and that rushed solutions could endanger Dai’s long-term sustainability.

Others in the community, like the pseudonymous LongForWisdom and Maker Founder Rune Christenson, were more open to solutions to restore the peg and increase Dai liquidity, namely slashing stability fees and expediting collateral onboarding.

Just this afternoon, Maker’s Head of Risk Cyrus Younessi posted four polls to gauge the community’s feeling on how to proceed:

  1. Are you in favor of adding LINK as a collateral type to MCD?

  2. Are you in favor of adding ETH with a lower liquidation ratio as a collateral type?

  3. Are you in favor of adding additional fiat-backed stablecoins (such as PaxUSD) as a collateral type?

  4. Are you in favor of significantly reducing the stability fee and liquidation ratio for USDC?

LINK looks like it will be fast-tracked for inclusion and # 2 seems like an odd fix, but Rune’s initial reply to ParaFi Capital may be the most prescient:

I think it would make sense to set all SFs to 0 (temporarily) and onboard as many new collateral types that the community has shown interest in, and that the domain teams state can be easily onboarded (so only erc-20’s). Taking such decisive action would hopefully have the effect of overshooting, taking the dai price below 1 USD, and from there the peg can then be stabilized from below, by increasing the DSR and the stability fees.

It’s clear that Rune sees a fully implemented Multi-Collateral Dai system as the key bulwark against the liquidity crunch that Dai finds itself in the long-term and the quickest way to restore Dai in the short-term. But never waste a crisis.

Important: Dai has been trading at ~ $1.015 on dYdX and Coinbase pro for most of the day. If it dips below $1.01, it may assuage fears of a Dai spiral.

Related: Popular currency blogger JP Koning’s latest in Coin Desk argues that Maker should consider negative rates.

How did we get here?

These are tough problems to solve. There are real long-term risks to account for, and there should be push back to short-term fixes for an ecosystem that hopes to be around for decades.

Taking a step back, the MakerDAO ecosystem features 3 pretty different interest groups:

  1. Dai holders

  2. CDP/Vault owners

  3. MKR holders

While there is large overlap in these constituencies right now, they will trifurcate in the future as the system develops. As Scott Lewis pointed out, CDP/Vault holders are much more sophisticated than Dai holders, which may be acquiring Dai to save in a stable currency, rather than opening a CDP to take a levered bet on the price of ETH.

Meanwhile, MKR holders, are the ones with decision-making power. It’s up to them to balance the interests of all three and create a sustainable and secure Dai ecosystem.

There is perhaps a more important constituency that MKR holders should consider: companies/projects building on top of Dai. Two companies come to mind: PoolTogether and Dharma.

Both are building consumer-facing products that leverage Dai but (almost) completely abstract away Dai/Ethereum. With other stablecoin options, it’s a simple choice of what works better and “better” typically means more liquidity – something that benefits all Maker stakeholders.


imToken exploited on Lendfme for $25m, Uniswap for $300k

A lot to still unfold after the largest attack ever in DeFi. There are good technical and Twitter explainers or articles from The Block and Coin Desk. The tldr is that imBTC is an ERC-777 token and there was an exploit unique to ERC-777 on Uniswap and Lendfme (or DForce) that allowed an attacker to reenter when withdrawing and essentially allows you to withdraw more than you supply.

To be clear, Uniswap (or more specifically, ConsenSys Diligence) publicly identified the re-entry attack a year ago during a smart contract audit and Uniswap never offered support for ERC-777 in v1 (even though imBTC had been listed on their official UI). Open Zeppelin even wrote a blog post in July about the ERC-777 reentrancy attack specifically.

DForce/Lendfme, on the other hand, should have been aware of this issue before they listed imBTC and their risk warnings should have gone to 11 after the first imBTC attack. And the same thing for imToken, which runs imBTC.

The incident highlights two key risk considerations going forward:

  • Listing assets is a core governance feature – Choosing not to have any say in what is listed – as Uniswap does – is also a governance choice, but the recent attacks (and bZx) show that the diligence that Maker applies to new collateral may be worth it.

  • Multi-asset pools increase complexity and risk exponentially – there is a 100x difference in the size of these attacks and that’s because all of the assets on the Lendfme platform participate in the same share-risk pool, as opposed to just the two asset-pools on Uniswap.

The incident is leading to a wider discussion on the safety and security of DeFi and increased calls for “composability audits”, but of course, who pays for these? And who watches them?

Liquidity providers bear the most risk in the current set up but there must be some type of diligence-as-a-service for the DeFi community. There may be something brewing. Regardless, the attack will lead to some thorny governance issues:

Click for poll results.

DEX activity heats up

In what was just a monumental news week, two huge announcements in the land of decentralized exchanges:

  • Gnosis launches new DEX with batched auctions – Targeting large trades in low-liquidity token pairs, low-liquidity trades, Gnosis’s new design executes trades in 5 minute increments by conducting a series of auctions across asset pairings and finding the most efficient routes to execute. TokenTerminal has a nice explainer. Gnosis has been around for a while (originally conceived as a prediction market project) and their unique design shows how new projects can fill a specific liquidity gap. Perhaps most interestingly, the front-end of the Gnosis Protocol, is owned and operated by DxDAO, a decentralized collective built on DAOStack that plans to launch other (decentralized) DeFi protocols in the future.

  • dYdX launches BTC-USDC perpetual swap, offering 10x leverage – dYdX has been hard to classify in the current DeFi taxonomy. It’s the 3rd largest lending protocol after Maker and Compound, but also cracks the top 5 DEX’s by trade volume. Their latest launch reaffirms their core focus: margin trading. The Bitcoin derivatives space has seen a lot of growth over the last year and the timing could not be better after BitMex’s problems last month. dYdX is now out in front in the race to build the “Decentralized BitMex” (followed closely by Synthetix). In its pursuit, dYdX took a page from BitMex. BitMex recognized early on that Bitcoin was a good product to speculate on but it was even better collateral for a digital derivatives exchange. dYdX, meanwhile, is using USDC for margin deposits and settlement. USDC will be stable collateral and easy to liquidate. And, of course, this may be the most serious attempt to corner the “DeFi BTC” (alongside tBTC, renBTC, PieDAO, etc) market and is most direct overture at institutional DeFi. Also, talk about a back door way for Coinbase to compete with BitMex and other exchanges. This may be just as good of news for USDC as it is for dYdX.

Chart of the Week: Tokens during their time of day

Cool chart from Flipside Crypto on when tokens are used during a day to highlight time zone differences. Dai is pretty even, but USDT shows a heavy Asian bias.

Tweet of the week: ETH yields > USD yields?

I’m not convinced that this will be a long-term trend but the relationship between ETH yields from staking will have some type of affect on stablecoin yields, which may lead to discrepancies between stablecoin yields on competing PoS networks.

Odds and Ends

  • Black Thursday losses spur $28 million class-action lawsuit against Maker Foundation Link

  • Andreessen Horowitz aims to raise $450m for second cryptocurrency fund Link

  • First look at China’s digital currency DCEP Link

  • Stablecoins pass $9bn, adding $3bn in the last six weeks Link

  • 0xTracker tool shows how 0x API sources its liquidity Link

  • Ethereum addresses for all major DeFi protocols Link

  • Atomic Loans Raises $2.45M for Bitcoin Lending Mainnet Launch Link

  • Update on EIP-1559 Link

Thoughts and Prognostications

That’s it! Feedback appreciated. Just hit reply. Jam packed edition. Be on the lookout for exciting development this week. Written in Brooklyn (again) where I enjoy the mornings in Prospect Parks and dogs without leashes. Jake and Ben won 3-0 yesterday in Euchre.

Dose of DeFi is written by Chris Powers. Opinions expressed are my own. All content is for informational purposes and is not intended as investment advice.

DeFi Transaction Packagers + Uniswap v2

DeFi Tx Packagers

As lego money building blocks, DeFi protocols can interact with each other in an almost unlimited number of ways. This composability is why, even with only a few financial primitives, a robust ecosystem has developed. Wallets and DeFi skins are tools for users to interact with different protocols, but the user is still responsible for approving every transaction.  

InstaDApp was perhaps the first project to package two or more transactions as a product. Last summer, as Dai struggled to maintain its peg, Maker hiked the stability fee, leading to large spreads between Compound’s Dai borrowing rate and the Maker stability fee. InstaDApp created a clever tool that allowed users to migrate debt from Maker to Compound with just a single click thanks to a proxy contract.

Since then, other tx packagers have emerged to help users save time and gas.

  • DeFi Zap – suite of products that either deploy capital across multiple DeFi protocols (Zaps) or give exposure to a trading strategy in a token (Zips). It has become a popular way to provide Uniswap liquidity pools and it now has several 1-click products that give traders an automated position, which isn’t that different than Set Protocol, but Set bills itself more as an asset manager.

  • DeFi Saver – it offered InstaDApp like functionality initially, but with the advent of Flash loans, it announced a tx packaging product that closes a CDP/Vault in 1 transaction by using a flash loan to borrow Dai, pay back Vault debt, withdraw ETH, convert to Dai and repay flash loan.

  • DEX Aggregators1inch, DEX.AG, Totle and Paraswap are doing a form of tx packaging. Finding the best price across decentralized exchanges is only part of it, now all aggregators use proxy contracts to split up orders across exchanges to avoid slippage. 1inch and Paraswap also use GasToken to reduce gas consumption. Aggregators are also planning to pass on trading discounts from staking DEX tokens like KNC or ZRX.

  • Yield EnhancersRAY from Staked, Idle Finance, Topo, iearn and a host of others are trying to offer an aggregated yield by rebalancing into DeFi lending protocols with the highest interest rates. Fluctuating rates, high gas prices and a limited data set have so far limited their efficiency, but packaging lending protocols across the same asset will surely catch on once the market reaches sufficient size.

DeFi tx packagers are not creating products for retail users, but they are the type of tooling and infrastructure that a mass market product would use. Flash loans will accelerate this trend.

Uniswap V2 Announced

On Monday, Uniswap released details on for its V2, set to be launched in Q2. Here is the blog announcement and the V2 whitepaper. There are no layer 2 or scalability upgrades but a whole lot more. Major additions:

  • Pair any token with any token – every asset in Uniswap v1 had to be pooled with ETH, forcing liquidity providers to take on ETH exposure. V2 allows pairing of any two assets, but this is mostly targeted at stablecoins. This has been one of the most requested features and will help liquidity providers with impermanent loss.

  • On-chain price oracle – Although several projects used Uniswap v1 as a price oracle, the team advises against it, not because it’s a bad price oracle (it’s actualy pretty good), but because it can be manipulated (remember bZx?). The v2 oracle is surprisingly simple: the average of the price in current block and the price at the end of previous block. An attacker would have to manipulate the price in one block and then mine the next block, but they would be susceptible to losses from arbitrage bots. Any DeFi project can use Uniswap as an oracle for any time duration using the TWAP (Time Weighted Average Price)

  • Flash swaps – pretty much what you think. Like flash loans, a user can borrow as much of any asset on Uniswap as long they pay back the loan within the same transaction. This will potentially democratize arbitrage opportunities (or just outsource them to miners?).

  • Protocol fee – Uniswap v2 includes a 0.05% protocol fee “that can be turned on and off”. Not entirely surprising, given the direction of dYdX and Dharma, but Uniswap has always positioned itself more as a public good than a product. That’s not to say that public goods shouldn’t charge a fee, but it’s a little surprising that Uniswap announced a fee before Compound. The fee will not be activated at v2 launch nor does the team expect it to be turned on in the “near future”. Likely, Uniswap views these contracts as long-term infrastructure, so they are including a fee structure for the option later down the road.

  • Meta transaction for pool shares – In v2, users can authorize a transfer of shares in Uniswap pools with just a signature (rather than an on-chain transaction). A small change, which may help Uniswap pool shares be used as collateral in lending protocols.

The ability to provide liquidity in stablecoin pairs should be the most attractive product feature to the current crop of Uniswap users, but the on-chain price oracle will likely have the biggest ripple throughout the DeFi community. The Uniswap v2 oracle will be free to use and may lead to the use of more priceless financial contracts that can’t be manipulated.   

Tweet of the Week: Uniswap LP returns

Uniswap LPs get some downside protection. It’s long been a mystery as to why so many assets sit in Uniswap, because impermanent loss means that simply hodling assets would be better. DeFi Zap Co-founder Nodar Janashia presents a Uniswap LP analysis that shows that in the market downturn, being a Uniswap liquidity provider insulates you from market losses.

Maker Debt Auctions coming to a close, what’s next?

Last Thursday, Maker kicked off its “FLOP” auctions, which sell newly minted MKR for Dai in order to cover the shortfall from the failed auctions during the market crash on March 12th.

So far, it has raised more than $4m Dai, which has been burned to recapitalize the system. Despite the emergence of the Dai Back Stop Syndicate as a buyer of last resort, the auctions have gone smoothly with auction prices being in line with current MKR prices (~$260).

White the Maker Foundation was a purchaser (or broker) for all of the auctions over several days, it appears that auctions are now being won by unknown addresses. There have been strong bids throughout – even when Maker won – so there is still demand for MKR despite the system malfunctioning.

There will surely be a lot more fallout over coming weeks but quick takeaways:

  • Maker is now just another DeFi project – Dai has always had this special luster in the DeFi community and received preferential treatment from developers and users. Those days are over. sUSD and USDT are likely to be the biggest beneficiaries with additional integrations. Most importantly, DeFi projects will now view Maker as the competitor it is. Compound will be a project to watch.

  • Real world assets accelerated – Maker was not shy that the move to Multi-collateral Dai was to open up the Maker system to real-world assets (like USDC). Now that Maker has ripped the band aid off, I don’t expect them to be shy about targeting the [regulated and compliant] mass market.

  • Will a trustless alternative emerge?Many in the DeFi and Ethereum community are not happy with Maker’s decision. Ameem floated MetaCoin, a governance-minimized stablecoin, and with more reliable oracles (like Uniswap v2), there will likely be another attempt at a decentralized stablecoin.

Chart of the Week: DEX Market Share over past 24 hours

The volatile market has been good for decentralized exchanges, which continue to post strong volume numbers. Dune Analytics has a great dashboard covering all the DEX activity, and with the addition of dYdX to its calculation, the dashboard now offers a comprehensive view of the DEX space. DEX volume is at about $20m a day for the past month. The market is surprisingly competitive with dYdX, Uniswap, Oasis, Kyber and 0x all taking more than 15% of volume market share.

Odds and Ends

  • New mass-market savings app, Linus, launches public beta Link

  • Gitcoin launches Round 5 of matching funding for public good projects Link

  • DEX.AG unveils limit orders, and Connect Wallet integrations Link

  • Metacartel Wave IV Grants Link

  • Dune Analytics offers Compound-specific data queries Link

  • US House bill considers “Digital Dollar” as part of Coronavirus stimulus Link

Thoughts and Prognostications

That’s it! Feedback appreciated. Just hit reply. Written in Brooklyn (again) where I try to get outside every day.

Dose of DeFi is written by Chris Powers. Opinions expressed are my own. All content is for informational purposes and is not intended as investment advice.

Maker Crashes, Dai Liquidity Crunch, USDC to the rescue?

When it rains it pours. As the world struggles to contain the COVID-19 pandemic, markets everywhere are crashing on expectations of a quarantined world. No asset class has been safe. Stocks, Oil, Gold, Bitcoin, and of course, ETH.

Early Thursday morning, the price of Ethereum plummeted 40% in a matter of minutes, which strained the Maker system and ultimately left it $5.4m undercollateralized after its collateral auctions malfunctioned.

Here is a chart from whiterabbit with the declining price of ETH and liquidations:

The dust hasn’t settled yet but so far we know oracle pricing was delayed and the Keeper auction, which liquidates collateral, failed.

Why did the auction fail? Atomica co-founder Renat Khasanshyn on Reddit:

Root cause #1: Catastrophic liquidity crunch. Keepers simply ran out of DAI to bid in the collateral auctions due to

  • I believe some Keepers were unable to continue Keeper operations due to inability to liquidate ETH fast enough for DAI.

  • Some Keepers shut down due to squeeze (bought ETH for 170 DAI, and hours later can only sell for 130 DAI at a loss – which is way more than 13% liquidation penalty).

Root cause #2: Network congestion. This brought many Keepers to its knees. Even with liquidity, many were unable participating in auctions due to stuck transactions & high gas costs. In addition, issues like longer client sync times + some Ethereum clients (like Parity) sufferring from known problems of keeping transactions stuck in Mempool for a very, very long time, amplified this problem.

Typically, when a Vault’s ETH collateral dips below 150% of its Dai loan, Keepers bid to liquidate the ETH for a 13% fee, but as ETH tanked on Thursday, the market for Keepers evaporated. They didn’t have enough Dai for the auction and their bid transactions were getting stuck because of high gas prices.

As auctions failed to get filled, some Keepers started lowering their bid price and increasing their gas to get their bids in. Eventually, a single Keeper liquidation bot won several auctions with 0 Dai bids.

What now?

There are three issues facing the MakerDAO system

  1. It is undercollateralized by $5.4m

  2. A liquidity crunch has caused Dai to lose its peg on the upside

  3. Several Vault owners got hosed

Usually, Keepers only sell enough collateral to cover the loan, leaving Vault owners with the remaining collateral minus the 13% liquidation penalty. But with 0 Dai bids, several Vault owners were left with nothing. No word on how Maker will deal with lost funds but their stories are already circulating.

The most pressing need is to stabilize the system. In the event of under collateralization, the Maker system is designed to auction MKR for Dai, diluting MKR holders and using the fresh Dai to recapitalize the system.

Unfortunately, problem #2 is preventing problem #1 from being resolved. There’s little Dai liquidity on the market at the moment so a MKR auction for Dai might end poorly or further distort the price of Dai.

Like any liquidity crunch, investors are hoarding cash and a capital injection is needed, but what tools can MakerDAO use to bring more Dai onto the market?

Stable Genius

As phone notifications buzzed with the market crash, investors rushed to buy Dai and pay off their Dai debts before liquidation. This put a squeeze on Dai liquidity across the system, sending Dai to as high as $1.14. While a price increase is good for other assets, not so for a pegged asset, especially since Maker debt is denominated in Dai.

Soon after, Maker moved to use its limited monetary tools to drive down the price of Dai, namely lowering the Dai Stability Fee to 0.5% and slashing the Dai Savings Rate (DSR) to 0%. The stability fee rate cut is intended to incentivize more Dai loans, while moving the DSR to 0 should make holding Dai – in the DSR or in a secondary platform like Compound or dYdX – less appealing.    

This has helped but Dai is still trading ~ $1.05 with liquidity tight and big spreads across DEXs and centralized exchanges. Many fear that if ETH continues to fall, there won’t be enough Dai liquidity for Keepers and lead to more 0 Dai collateral auctions.

So how to get new Dai into the system? Centralized fiat stablecoins of course.

USDC to the rescue

On Monday, after another big ETH drop, the Maker Governance and Risk team conducted a call to discuss the possibility off adding USDC as an additional collateral, alongside ETH and BAT.

While some raised concerns about introducing regulated, real-world assets into the decentralized stablecoin system, an Executive Vote to add USDC as collateral passed late Monday night and the Oasis app is now accepting USDC as collateral with a 20% Stability Fee and a 20m debt ceiling.

Why would Maker rush through an upgrade that adds a competitor as collateral?

Because USDC-as-collateral provides the fiat-on ramp that Dai never had.

Maker hopes that market makers, Keepers and Vault owners that are short on Dai can get USDC from Coinbase, lock it up in a Maker Vault to generate Dai and pay down debt or use it in liquidation auctions, and while Dai’s trading above its peg, you could deposit USDC, mint Dai and sell it for a small profit.

This virtuous feedback loop should drive down the price of Dai and provide additional liquidity for the collateral auction and the upcoming MKR auction.

MKR holders are on the hook for the system’s imbalance

Maker is essentially a financial institution with bad debt on its balance sheet. In such an event, MKR holders are responsible for recollateralizing the platform through an auction of MKR for Dai which is set for Thursday.

MKR price has taken a beating since last week, down more than 60% over the last week to $210 at the time of writing. Prices may be attractive but the market is in no mood to absorb an additional token offering, especially given the last week for Maker.

Still, Maker is well known in the Ethereum and broader crypto investor community and should find some appetite. Paradigm, a large holder of MKR, announced that it would be participating in the auction.

Additionally, an organic Dai Backstop Syndicate has emerged to be a “MKR buyer of last resort”. A group of DeFi projects and developers just released a smart contract spec that would allow individuals to deposit Dai and participate in the auction at a set price for the pool (Likely $100/MKR).

DeFi’s Black Thursday

The volatility last week was not unique to DeFi or ETH, Bitcoin also plummeted and several exchanges (Bitmex) had trouble dealing with order flow and liquidation.

Price discovery was moving quicker than the transaction processing.

Three concluding thoughts:

  1. Lending protocols are three-sided markets. Liquidators are just as important as lenders and borrowers. Also, why not use Uniswap?

  2. Maker and other DeFi projects should better highlight downside risks to regular users, particularly when the protocol malfunctions. Vault owners need answers.

  3. The MKR auction on Thursday (and who buys it) will be the first indication of how USDC as collateral will be accepted by the Maker community. An early Maker developer has spoken against it.

Odds and Ends

  • Synthetix Product Roadmap Link

  • Balancer, a Uniswap like protocol, open sources its contracts Link

  • Cool visualizer tool for Maker Vaults Link

  • Dune Analytics adds dYdX to its DEX volume statistics Link

Thoughts and Prognostications

That’s it! Feedback appreciated. Just hit reply. Written in Brooklyn where it looks like I’ll be for a long time.

Dose of DeFi is written by Chris Powers. Opinions expressed are my own. All content is for informational purposes and is not intended as investment advice.

Crypto Joins Global Markets in Free Fall + MIT Bitcoin Expo

Bitcoin and ETH plummeted on Sunday, but hardly anyone cares as global markets slide further into uncertainty and panic over COVID-19 and Saudia Arabia’s oil shock.

I won’t add to the market hot takes, but two highlights for DeFi.

Liquidations on Compound, dYdX and Maker have gone bonkers in the past week, creating serious profit opportunities for liquidation bots.

With dYdX and increased volume throughout the day, this number will likely approach $75m in daily volume across DeFi DEX’s. 0x’s Liquidity API with strong volume too.

MIT Bitcoin Expo + Cryptoeconomic Systems conference

I was in Boston this past weekend and wanted to highlight a few interesting presentations. I found myself more interested in the Cryptoeconomic Systems track, which featured presentations of published papers in the new academic journal.

Fractional Reserve Bitcoin Banking

Bitcoin has long been seen as a rejection of the rehypothecation of money and an attack on fractional reserve banking, but several panelists expressed concerns about this growing trend in Bitcoin.

Essentially, exchanges and specialized lending shops like Blockfi or Babel lend out Bitcoin to traders and financial institutions typically to short it. The bitcoins come from depositors and long-term hodlers who want to earn a yield on their idle Bitcoin.

Say I deposit 100 bitcoins in Blockfi and it lends all of them to a trader. My Blockfi account says I have 100 bitcoins, but the trader actually has 100 bitcoins to freely transact or sell, essentially adding 100 bitcoins to the total supply.

Exchanges, particularly those in Asia, are aggressively building out lending capabilities. It seems nearly impossible to stop bitcoin-based financial products, but the community is looking for solutions, like Proof of Reserves, that provide transparency to the risk that the Bitcoin lending facilities are exposed to.

This, along with the growth of Bitcoin in custody, illustrate the conflicts between Bitcoin’s traditional values and its expansion into new products and investor markets.

Cloud Crypto Land: Limits of a Blockchain-based Economic System

Lawyer Edmund Schuster gave the skeptical take for the weekend, presenting a paper on how blockchains and existing legal systems don’t mix, as he said, “Decentralisation is [the] absence of hierarchy; rule of law, as any rule, requires hierarchy”.

Schuster’s argument focuses on real-world assets, including property rights, intellectual property or any other asset that requires enforcement by a third party. Bitcoin and ETH, assets that are native to the blockchain, are more useful but suffer the same fate whenever these assets interact with the “real world”.

I have some disagreements, but the framing is solid. The takeaway is that the two systems won’t interact seamlessly, but rather through specific (regulated) gatekeepers.

Having said that, I think he underestimates two things:

  1. The ability of a blockchain-based system to become a sustainable economy in the digital world without any reliance on existing legal systems. This exists already. You can quibble with the future size, but there will be an independent blockchain-based system, much like there is an unregulated cash economy.

  2. The efficiency benefits of digitization. Tokens, Schuster argues, are only a small improvement from medieval merchants trading pieces of paper because both only work when the transaction is simple (ie no lawyers). But, even if courts could roll back a transaction, DeFi protocols demonstrate the benefits of programmability and transparency of digital assets, even in a regulated world.

Money and Credit in a Crypto Economy: Securing Liquidity Without the Need for Central Control of Issuance

An ambitious paper, but that’s what you might expect from a team named Economic Space Agency. While many disparage debt-based money (aka fiat), the paper and the talk by Akseli Virtanen, explore how to disseminate credit if money is not debt-based.

The talk builds off of ideas in David Graeber’s Debt: The First 5000 Years, which I think is one of the most important books in the crypto space. Essentially, Graeber argues that money never emerged in a barter economy, but that all forms of money throughout history are essentially IOUs from debtors that everyone trusts.

Economic Space Agency aims to build a new credit system with stability that is built on mutual stakeholding:

In a system where all agents can participate in issuance within the distributed exchange protocol and network, when offer matching is mediated through a common asset (or unit of account), netting enables exchange and settlement to occur without the need to actually hold the common asset (or unit of account). It means a non-money-intermediated means of liquidity: a distributed monetary system that can secure liquidity without the need for central control of issuance/un-issuance of a money instrument. The goal of the mutual liquidity protocol we propose is not to issue credit with the objective of seeking an income stream (interest payment of debt), but a mutual responsibility for securing inter-temporal matching on a ledger. Credit-for-mutual-liquidity and equity-for-mutual-stakeholding represent a profound change in our understanding of the economic roles of debt and equity.

An audience member commented that they’re proposing a non-interest rate credit system that sounds awfully familiar to Islamic banking.

Two other papers of interest:

Chart of the Week: Funds in Compound Top 100 addresses

Elias Simos and Tara Tan included this chart in their State of Crypto Report, which they presented at MIT Bitcoin Expo. The chart (in log scale) shows the amount of funds held by the top 100 addresses on Compound. It’s a good reminder that although it democratizes access to financial services, DeFi – like traditional finance – is a whale’s game. Large investors will still dominate DeFi until its products and services have a wider appeal.

Odds and Ends

  • DeFi wallet Argent raises $12m in Series A, led by Paradigm Link

  • dYdX introduces trading fees & new business model Link

  • DeFiZap launches programmable pooling incentives for SNX & sETH Link

  • PieDAO aims to create ETFs for DeFi Link

  • pTokens launch, joins crowded BTC on Ethereum market Link

  • New Bankless podcast with Ryan Sean Adams and David Hoffman Link

Thoughts and Prognostications

And then there’s this update to a cool chart from Alethio mapping the DeFi ecosystem:


Updated Network graph (past 3 months) built on top of our DeFi API: Living version coming soon! Check out our DeFi dashboard @ in the meantime (more protocols & visuals being added each week!). A couple key takeaways below…

That’s it! Feedback appreciated. Just hit reply. Written in Cambridge on what feels like the beginning of Spring. Shout out to Dimagi for giving me a desk today.

Dose of DeFi is written by Chris Powers. Opinions expressed are my own. All content is for informational purposes and is not intended as investment advice.

Governance can’t be avoided forever

The DAO has long been Ethereum’s most formidable experience. Crises early in a startup or movement’s history often have an outsized effect on the culture and values as it develops, and the hack and loss of $50m (when ETH was $15) instilled two key lessons for the young Ethereum community:

1.     Security is tantamount with trust in the protocol

2.     Significant changes to the protocol can be implemented when there is overwhelming, informal consensus.

In order to fix the DAO hack and recoup the loss, the Ethereum community decided to hard fork and return the stolen funds. There was a vocal minority that followed the original chain – now referred to as Ethereum Classic – but the overwhelming majority of Ethereum community members supported the new chain, in part because 14% of all ETH at the time was invested in the DAO (by contrast, there is less than 3% of ETH locked in DeFi).

The DAO hack illustrated the perils and promise of smart contracts, which come with a higher level of responsibility and security. Former MyEthereumWallet and Current MyCrypto CEO Taylor Moynahan, a veteran of Ethereum’s early days, carried the security-first banner into DeFi last month with a talk at ETH Denver and a series of public critiques of the bZx’s risk and security standards.

Meanwhile, since the DAO hack, Ethereum’s reliance on overwhelming, informal consensus has worked surprisingly well, and many expected the rickety governance model to be just enough to get it to the ETH 2.0 upgrade.

This loose governance structure, however, can only solve black and white issues, which is why the Ethereum community is in an uproar over ProgPow, because it can’t value the political contribution of users, investors and developers that are building on top of Ethereum, to say nothing of EIP-1559.

Even with the recent contentious debates, there is little support in the Ethereum community for any type of on-chain governance, but that hasn’t stopped DeFi from pushing forward with it to live up to its decentralized goals.

$COMP token and Compound’s simple governance process

Compound aims to create a governance structure that would allow it to be a piece of financial software that is “permanent and upgradeable by the community”. The $COMP governance structure, which was unveiled last Wednesday, will set a precedent for post-ICO token governance and influence Uniswap and dYdX’s decentralization plans.

Not all details about $COMP governance structure have been released but this is what we have so far:

  • $COMP tokens will initially be distributed to Compound shareholders; $COMP is not a fundraising tool.

  • 1% of $COMP is required to submit a governance proposal, which must be executable code

  • There is a 3 day voting period for all $COMP holders, who can also delegate their voting rights

  • If > 50% and a 4% quorum, then the proposal is queued and implemented after 2 days.

The voting period and 2-day timelock delay are lessons learned from Maker governance, and the 1% minimum threshold is a smart anti-spam measure. Compound only envisions standard proposals that could add a new asset, change an asset’s collateral factor or change a market’s interest rate model.

The Compound governance contract has been audited by Open Zeppelin and is currently running on the Ropsten testnet, but there are two clear unknowns that Compound will have to answer in the future:

1.     What value will $COMP have?

2.     How will $COMP be distributed?

$COMP is not meant to be a fundraising device, but there must be a reason for someone to hold it, some benefit that it brings them. Compound argues that businesses that build on top of the protocol – including Compound and its shareholders – will hold $COMP tokens so they can influence the protocol and protect their business interests.

This sounds awfully familiar with 0x’s original token model, which it scraped in favor of a staking system. That’s not to say it won’t work. 0x’s problem wasn’t bad governance; it was the token price. ZRX token holders saw value in an increase in the token price, not from a functioning platform with a separate revenue line that depends on it. Its token model had to change to reflect the interests of its token holders.

Compound governance’s success depends on who holds $COMP and how it is distributed. Early token holders will establish governance norms and need to place the long-term development of the platform over short-term price fluctuations.

Who gets $COMP? The Compound team and shareholders will be early recipients, followed by developers building on top of the platform, at the discretion of the team. And then it will need to distribute tokens to its users; it will likely use earned interest by address, as it did for additional asset voting, to weight the initial distribution.

Compound can draw on its these core constituencies to form an initial governance community, but as soon as $COMP is freely tradable, people will want to speculate on it and get a piece of the 2nd largest DeFi project.

As such, Compound will do whatever in its power to ensure that velocity of the $COMP token remains low. I expect Compound’s governance and decentralization push to move slowly and include lengthy lock-up periods for distributed tokens.

Chart of the Week: DEX volume peaks

February may be the shortest month, but decentralized exchanges (DEX) had their best month of volume ever, with over $372m in volume according to Dune Analytics. The DEX wars twitter bot put the number at $439m but neither of those include dYdX, which reported $160m in volume in February. The volumes are in line with what centralized exchanges saw in February and is not evidence of a shift to DeFi protocols by existing crypto users but does demonstrate their staying power.

Building secure applications in a collaborative environment

Crypto Twitter and Telegram were abuzz this past weekend because an integration (iEarn) with the promising stablecoin liquidity pool swap Curve experienced a trade with massive slippage, leading to iEarn’s founder leaving the space. The above poll from 1kx’s Lasse Clausen is split 50/50, with half claiming that responsibility lies with the developers and the other half putting the onus on the users. While the current debate may be mixed, the next million DeFi users will surely not take responsibility.

Odds and Ends

  • Synthetix uses Gnosis’s dFusion for SNX auction to restore sETH/ETH peg Link

  • 0x updates on staking, liquidity API and off-chain orders Link

  • Making Maker: February 2020 Link

  • Loopring launches first zkRollup-enabled decentralized exchange Link

  • Top 5 DeFi apps by active Ethereum addresses Link

  • Drip aims to bring Coinbase’s Earn to DeFi education Link

Thoughts and Prognostications

That’s it! Feedback appreciated. Just hit reply. Written in Brooklyn. Today’s sun made me forget the weekend’s cold. I’m in Boston next weekend for MIT Bitcoin Expo, let me know if you’re around.

Dose of DeFi is written by Chris Powers. Opinions expressed are my own and do not necessarily reflect the opinions of others. All content is for informational purposes and is not intended as investment advice.

Bond defaults build credit markets

Bond defaults are part of a healthy financial system. It is undoubtedly bad for the borrower that reneges on their debt, and also not good for the lender, who has to take a hair cut, but they are helpful to the system as a whole. Most importantly, defaults price risk for credit markets, giving lenders valuable information about the downside risk.

Typically when a company defaults on a bond, the lender doesn’t lose all of its investment. “Default” could lead to a new payment schedule, liquidation of the borrower’s assets, or the lender could trade the loan on the secondary market for a discount.

Without a prior example to look to, it’s impossible for borrowers, lenders, insurers and other liquidity providers to build services for what happens if things go south. Without a precedent, markets can’t build confidently.

bZx sets a DeFi precedent

When news broke last Saturday of losses on bZx’s Fulcrum margin trade and lending platform, even bZx critics and pessimists could not have seen how the story would further unravel with an additional hack two days later and then an accusation by of another ignored vulnerability in bZx’s platform.  

There is still a lot to shake out, but given that this is DeFi’s first hack/exploit/default, what precedent will be set for future?

Smart contract insurance faced its first test

Self-regulation and industry standards

There has been an awful lot of soul searching the last week in DeFi, with a lot of genuine concern and reflection over the responsibility of building systems that manages people’s money.

“Audit” gets thrown out a lot, but it’s quickly turning into the “ICO Whitepaper” of DeFi. It’s not clear who should do the audit or what they should be looking for, especially as flash loans open up new attack vectors on DeFi smart contracts.

There was an attempt to self-regulate in 2017, but there were always new investors to trick. DeFi may be small enough to institute some rigor and standards within the industry. ICO scams hurt the image of Ethereum, but DeFi projects face a far greater risk of brand damage, given the interconnectedness and the shared DeFi brand.

Nothing changes unless investors demand it. Chris Blec has done good work in highlighting the admin privileges and opsec risk of different DeFi projects, but the bZx incident will likely kick off a more structured attempt to self-regulate DeFi, to say nothing of actual regulation.

The Future of bZx

It’s tough to defend bZx. They clearly made mistakes and have not managed the message well. But I can’t help but wonder what will happen to their iETH pool?

The attacks drained the ETH pool of nearly $1m, but that didn’t destroy the logic of the ETH pool, which is still kinda functioning. It’s paying a 42% interest rate to depositors, although there is no ETH left in the pool, because as soon as someone deposits ETH, the liquidity is taken by desperate iETH holders trying to withdraw their ETH.

The high interest rate is intended to attract risky borrowers, which it’s doing, but can it attract enough to make bZx solvent? If so, when?

Dogecoin has proven that you can’t kill cryptocurrencies, and I imagine the same is true for liquidity pools. Might an investor recapitalize the pool? Or is the iETH pool destined to be a perpetual FOMO3d for DeFi borrowing?

DeFi frontrunning could enhance Ethereum’s security model

Since miners see transactions in the mempool as soon as they are broadcast, frontrunning has been a big problem in DeFi, especially for Synthetix. Miners could do the same thing for flash loans. This won’t protect DeFi protocols from flash loans, but DeFi arbitrage could be a new revenue source for miners that secure the Ethereum network. More revenue from arbitrage means lower fees and less ETH inflation.

Maker governance scare; Uniswap liquidity drained

The flash loans hysteria reignited a debate about MakerDAO’s governance module. In December, Micah Zoltu pointed out that with just 8% of MKR, an attacker could take control of all ETH collateral in the MakerDAO system.

Ethereum’s Dark Knight, Ameem Soleimani even proposed TakerDAO, which would pool MKR in a smart contract until the 8% threshold is met and then execute the attack and pay out the ETH to all the addresses that pooled MKR.

With flash loans, the cost of attack is greatly lowered. An attacker could borrow ETH, acquire enough MKR on Uniswap and Kyber to trigger the governance attack, steal the ETH collateral in MakerDAO and have more than enough to pay back the loan. 70% of MKR was removed from the ETH/MKR pool on Uniswap, presumably by MKR holders who didn’t want their tokens used for an attack.

Soon after, MKR holders voted on a more permanent solution, giving a 24hr delay in the event a bug is found. The spell also set the DSR to 8%, the SCD stability fee to 9.5% and raised the debt ceiling to $150m.

Chart of the week – ETH TVL drops

After a steady climb for months the amount of ETH locked in DeFi protocols fell sharply last week. The bZx hacker literally took thousands of ETH out of DeFi but the drop has mostly come from the market’s response. A good chunk of ETH was taken out of Uniswap to prevent the Maker governance attack mentioned above. Maker saw a lot of ETH outflows itself as investors closed vaults. DeFi inflows and outflows fluctuate and it’s not surprising that bad industry news led to outflows. Don’t worry, TVL is still above $1bn.

Odds and Ends

  • Synthetix’s silver price feed, powered by Chainlink, falters, trader profits Link

  • Synthetix prepares for the Archenar Release Link

  • DeFi lego, the many versions of Dai Link

  • Summary of the two bZx attacks Link

  • Enigma settles with SEC over its $45 million ICO in 2017 Link

  • RealT V2 integrates Compound to increase yields for property owners Link

  • Dharma launches Android app to go after DeFi retail market Link

  • Uniflash aims to be Uniswap for Flash Loans Link

Thoughts and prognostications

That’s it! Feedback appreciated. Just hit reply. Written in Brooklyn, where it felt like Spring today.

Weekly Dose of DeFi is written by Chris Powers. Opinions expressed are my own and do not necessarily reflect the opinions of others. All content is for informational purposes and is not intended as investment advice.

ETHDenver Report + bZx platform exploit

Note: I attended ETH Denver hackathon this past weekend. Below are some highlights of the projects and the presentations, but first what everyone was talking about – the bZx trade exploit.

Trader exploits bZx platform

In its just released post-mortem, bZx sums up the attack/hack/exploit as such:

The attack was launched on Valentine’s day, a Friday Night, and during ETHDenver when the team was out. We immediately returned home from the tBTC happy hour.

We returned home and analyzed the transactions. The series of transactions were extremely complex and did not yield to a straightforward chain analysis.

We made the determination that the attack could continue, that lender funds were at risk, and that we needed to take steps to disable the attack.

bZx links to this post from Blockchain security firm, Peckshield, for a detailed run down of the attack. It comes with this nice graphic:

There has been an awful lot written on this and I’m sure there will be more, but three thoughts from me:

  1. Trusted brands matter, even in DeFi. the frenzy and confusion after bZx shut down it’s website Saturday morning was no different than past centralized exchange hacks. The loss is small enough for bZx (or its future token holders) to make lenders whole, but users will hold bZx to the same standard as Binance, who experienced a $45m hack last year. DeFi protocols are permissionless, but if the companies that build them want to attract assets, they’ll need to convince users to trust them – decentralized or not. Governance and insurance will be important to any solution.

  2. A new DeFi Legal Precedent? The trading activity is likely illegal under market manipulation rules in the U.S, but I can’t imagine bZx suing the alleged attacker. Still, exchanges (and Chainalysis) will soon have a decision to make and this trade activity will surely get the attention of regulators. There likely won’t be any legal repercussions this, but it will be an example used by investors when discussing risk and compliance for DeFi projects.

  3. Flash Loans, Wow. Arbitrage opportunities used to require sophistication and capital, but in DeFi, only sophistication is needed. As smart contract audits have become routine, so too will economic and blockchain simulation, like what Gauntlet did for Compound last month.

Perhaps the biggest takeaway is the additional eyeballs. bZx has gotten more than 1,000 new Twitter and Telegram followers as a consolation, and much of Crypto Twitter is fascinated with the attack, realizing the potential and possibilities of DeFi.

There’s so much out there on this, but a couple recommendations:

ETHDenver Presentations & Panel Discussions

  • Mariano Conti (Maker)Mariano focused on developments in Maker’s Governance Security Module (GSM). The GSM is how Maker would update the system in the event of an emergency system. The “Dark Fix” would institute a 24 hour delay and show the fix only to large MKR holders. Mariano also highlighted initiatives to increase voter participation. He said anyone could delegate votes to a particular smart contract, while still maintaining custody, which could create proxy advisors that vote on behalf of MKR holders.

  • Dan Elitzer (IDEO Co Lab Ventures) – Dan explored the implications of liquidity pools like Uniswap, Compound and Balancer. He described the “Ultimate Superfluid Protocol” where you can:

    • Deposit any asset, in any proportion

    • Deposit any asset, in any proportion

    • Automatically get rebalanced as prices shift

    • Automatically earn trading fees via AMM

    • Automatically earn interest on loans of your assets, over-collateralized by other asset types you’ve deposited

    • Automatically regain your financial privacy

  • Various others:

    • Nate Hindman (Bancor) – Bancor is exploring how to connect their liquidity pools to Compound or the DSR and researching pools with 3+ assets. “Aggregated liquidity is a race to the bottom. Proprietary liqduidity is a race to the top”

    • Felix Feng (Set) – TVL is good for Set but other DeFi protocols should look to other metrics. Felix said that after the bZx exploit, projects need to worry about a smart contract audit and an economic incentive analysis.

    • Noah Zinsmeister (Uniswap) – Team is working hard on Layer 2 and trying to balance competing interests from liquidity providers, traders and arbitrage bots. On DeFi, “Things bubble up immediately, rather than sitting under the surface and crashing like 2008”

ETHDenver Hackathon Projects

A full list of all projects and the winners is available here. Below are a couple highlights

  • UpsideDai – 20x leverage on the price of Dai

    • 2 token model to allow users to hedge their Dai exposure or bet on Dai price

    • Decentralized oracle that leverages Uniswap and Maker Medianizer

  • OhMyDeFi – decentralized options platform

    • Starting with call & put options on the Dai/ETH price, by combining both call & puts, they can offer hedging for price of ETH

    • Like other insurance/options problem, needs to get parties to agree on same maturation date

  • MakerDAO BTC Vault – The Ren Protocol team built a Maker integration on Kovan testnet where zBTC, Ren’s trustless version of BTC, is accepted as collateral in MakerDAO Vaults to mint Dai.

  • Ethsplainer – breaks down Ethereum transaction data, explaining what the string of characters refer back to.

  • Outfront – Prevents malicious transactions by ‘catching’ the tx in the tx pool and paying a higher gas amount to stop the transaction.

Odds and Ends

  • mStable aims to be stablecoin of stablecoins Link

  • tBTC released on Ropstein test network Link

  • Huobi launches ERC20 version of Bitcoin to compete with WBTC & imBTC Link

  • Skale is first project on Consensys’s token issuance platform Activate Link

  • MetaCartel Venture DAO launches on main net Link

  • Kyber does more than $10m in one day volume Link

Thoughts and Prognostications

That’s it! Feedback appreciated. Just hit reply. Written in Denver and a stopover in Nashville. Snow in Denver, sunshine in Nashville.

Weekly Dose of DeFi is written by Chris Powers. Opinions expressed are my own and do not necessarily reflect the opinions of others. All content is for informational purposes and is not intended as investment advice.

Bitcoin? No, just the US Dollar

There’s a common trope where a Bitcoiner – typically an American male – admonishes an inflation-ravaged country and preaches the gospel of Bitcoin and its fixed supply. From his comfortable perch on Twitter, he speaks of how Bitcoin is the solution to a developing country’s woes, if only the people would appreciate hard money and Austrian economics.

So far, Bitcoin has not been a savior to any economy. Its censorship resistant P2P payments have given individuals in repressed regimes an important lifeline, but it has not been adopted at scale in Venezuela, Zimbabwe or other inflation-challenged countries.

Why we can’t have nice things

Independent of the rise of cryptocurrencies, the last 25 years has also seen the rise of dollarization in countries whose populations have lost faith in their local currency. Some currencies, like the Hong Kong Dollar or Saudi Riyal, are pegged to the USD to ease trade with the global economy. 

Other countries have simply replaced their local currency with the U.S. dollar. Sometimes, this is initiated in a top-down fashion – as was the case in Zimbabwe – where the government demonetized the local currency and adopted the U.S. dollar to stave off runaway inflation.

In other instances of dollarization, the process was more bottom-up. In Cambodia and Ecuador, the local populace, frustrated with the fluctuating price of the local currency, began using U.S. dollars for daily transactions. An influx of U.S. dollars from tourists and international aid funded an unofficial dollar economy, which grew and grew until the governments begrudgingly accepted dollarization and made it official policy.

Ecuador no longer has a national currency after it embraced dollarization in 2000, and in Cambodia, over 90% of bank deposits are U.S. dollars compared to less than 10% in the Riel, its national currency.

Dollarization hurts local governments revenue coffers and inhibits their ability to enact monetary policy, although perhaps that is a good thing for the population. More dollars in the local economy make it more attractive to foreign investors. Both Ecuador and Cambodia saw a decade of consistent economic growth after the switch to the dollar.

Once dollarization occurs, it’s difficult to go back. Even if de-dollarization is better for the country as a whole, it’s a collective action problem: for any one individual, it makes sense to save and transact in dollars. Last year, Zimbabwe re-introduced the Zimbabwe dollar a decade after abandoning it, but the inflation fears have reappeared and the government’s efforts to require the use of the Zimbabwe dollar have largely failed.

Have you heard of Bitcoin?

Bitcoin has a great brand. Ask anyone on the street and they likely have some vague understanding of it as a “digital currency” that’s not that different from a Bitcoin Maximalist on Twitter.

Its penetration cuts across geographic and socio-economic lines, but as pervasive as Bitcoin’s brand is, it’s nothing compared to the U.S. Dollar, which can already be used to pay for goods and services in nearly every country in the world.

We often conflate Bitcoin’s role as a monetary experiment (fixed supply) with its innovation as a payments technology (a global decentralized network trustlessly processing transactions). The monetary experiment will play out over the coming decades, but initial failures of Bitcoin as a daily currency are not rejections of global, decentralized payment networks.

Dollarization requires dollars (duh). In the past, local dollar economies were constrained by the amount of hard currency circulating in the country, but with the rise of stablecoins and smart phones, individuals in struggling economies should have a much easier time acquiring and transacting in U.S. dollars.

We thought they wanted Bitcoin, but maybe it was just the U.S. dollar?

DeFi? DeFi!

So how does this relate to DeFi? While most of DeFi’s current users are ETH-heads, digital dollarization will bring a global userbase to DeFi products and services.

Jill Carlson argued late last year, “the primary utility of cryptocurrency lies in engaging in financial activity that is otherwise suppressed or prohibited.” In many cases of dollarization, U.S. dollar transactions were prohibited, because they are seen as a challenge to the national currency regime.

A globally accessible USD savings account is the best contender for “DeFi killer app”. It’s also seen as a destabilizing force by almost every authoritarian country in the world. If U.S. dollar accounts were widely available, dollar transactions would inevitably rise at the expense of the local currency and the government’s seignorage.  

DeFi could enable unofficial dollar economies to scale and interact with the global economy, even if their local governments discourage or ban the use of the dollar.

A dollar savings account is just the first step. There’s also high demand for U.S.-listed stocks by populations who can’t access them, and trade with other countries (digital and physical) would likely increase if a U.S. dollar stablecoin could be used for daily transactions within a country.

Another American Male Opinion

There still are two large unknowns:

1.     How to get the dollar stablecoins into the country?

2.     How will the U.S. government view dollar activity outside the U.S.?

Dollar stablecoins don’t grow on trees. They can enter an economy through exchanges for local currency, gifts, or payments for goods and services. The easiest way – exchanging for local currency – is typically restricted by governments concerned about capital flight. Perhaps there will be more opportunities for individuals to earn digital currency, but this remains a difficult distribution problem and on- and off-ramps still matter. Western Union, Moneygram, Transferwise and other money remittance businesses have unappreciated distribution.

Regarding #2, Americans are mostly concerned with themselves, and while some have begun to understand how the dollar can be weaponized, there is not yet an appreciation in the U.S. for the world’s demand for the dollar and dollar-denominated assets.

It isn’t clear how stablecoin use will be regulated in the U.S., let alone in other countries. A bank-backed stablecoin like USDC could be freely transferred and used for saving by those outside the U.S., even if the physical dollar was custodied by Coinbase in the U.S.

Of course, USDC transfers could be frozen by the U.S. government, so it might only be allowed in countries that are hostile to the U.S.

MakerDAO’s Dai, on the other hand, does not rely on any bank regulated in the U.S and there technically aren’t any US Dollars involved. Dai is a synthetic asset backed by ETH (and BAT…) that tracks the dollar, and its peg is not too different than the Hong Kong Dollar or Saudi Riyal, except that Dai is 1:1 with the USD.

Of course, if the synthetic dollar economy grows considerably, the Fed may try to regulate it or just undercut it by making an official U.S. digital dollar more accessible.

Stablecoins have grown considerably in crypto terms, but they are still small in the broader macro economy sense. At the moment, they are primarily used by crypto traders, but as additional financial services (DeFi and CeFi) are built, stablecoins could find a much larger market in developing countries with an insatiable demand for stable U.S. dollars.

If you prefer a personal take and a video: Maker’s Mariano Conti spoke eloquently at Devcon 5 about how Dai helps him fight 50% inflation in his home country of Argentina. While Mariano is an ETH-head, his talk shows how dollarization and DeFi can grow together.

Number of the Week: $1bn locked in TVL

It’s hard to pick another number this week; the DeFi community celebrated as the Total Value Locked in DeFi passed the symbolic $1bn, according to DeFi Pulse. The growth has been fueled by a rise in the price of ETH, but also from organic flows of more ETH, Dai and USDC deposited into DeFi protocols. The industry wide growth comes despite a TVL decline at Synthetix, which slipped back to 3rd behind Compound in DeFi Pulse’s rankings.

Odds and Ends

  • PoolTogether raises $1m to help fuel growth Link

  • Dr. Li, Coronavirus Whistleblower, memorialized on Ethereum blockchain Link

  • Curve Finance aims to lower slippage on trading stablecoins Link

  • Blocklytics introduces NFTs for Digital Ads Link

  • DEX.AG v2 launches with multi-DEX orderbook Link*

  • Dharma launches dTokens to help fund development Link

  • DeFi’s first ‘Collateral Swap’ Link

  • New Maker governance vote for Dai Savings Rate and Stability Fee change Link

Thoughts and Prognostications

That’s it! Feedback appreciated. Just hit reply. Written in Brooklyn. I have yet to see snow this winter; maybe at ETH Denver this weekend – holler if you’re around.

Dose of DeFi is written by Chris Powers. All content is for informational purposes and is not intended as investment advice.

PoolTogether and DeFi gamification

Finance has always felt like a game. On Wall Street, the goal is to get a bigger number, while everyday investors are just trying to beat their neighbor down the street who is all in on TSLA.

Humans are competitive species, against ourselves and against others. As soon as something is quantified and a score attached to it, we instinctively want to track and improve the metric, and then if possible, compare to others.

The personal fitness industry grasped this quickly. Cycling classes prominently display screens with participants’ heart rates and RPMs. Wearables give fitness fanatics a steady stream of new data and just being aware of the numbers ends up leading to more activity.

Creators of these products and services understood human psychology and built a user experience around it to drive engagement. The key insight is that products can create more value not by optimizing the perfect workout, but instead by focusing on how to motivate a user to start, continue or advance an exercise regiment. “Are you working out?” is more important than “Are you working out correctly?”

As fees move to zero, financial services are increasingly becoming about investor psychology more than investment strategy. Financial advisors are no longer promoting hot stock tips, but figuring out the best ways to deliver widely held investment advice.

Often, financial advisors’ greatest value is to prevent a client from selling during a market rout. Likewise, some challenger banks encourage savings by rounding up every transaction and putting the extra change into a savings account.

The financial advice is basic (save more). It’s the encouragement of this activity that creates value for the user. “Are you saving?” is more important than “Are you saving correctly?”.

PoolTogether – a no-loss lottery

DeFi enables a new set of tools to design products and services to drive desired behavior and there is no better example of this than the no-loss lottery PoolTogether.

Humans love to gamble and lotteries are one of the most ubiquitous games across the world. For lotteries, the reward could come after 1 ticket, 5 tickets or n tickets. Famed psychologist B.F. Skinner referred to this reward model as a variable ratio schedule and found that it was the most effective way to reinforce a behavior.

According to Skinner, the unpredictability of the rewards’ timing reinforces behavior more so than if the rewards come on a fixed interval schedule, which gives a reward at predictable time intervals (like saving).

PoolTogether built its no-loss lottery on the same concept. In a standard lottery, funds would be pooled together and then a randomly selected winner would receive all proceeds. But in PoolTogether, the pooled funds are invested into Compound’s Dai market to earn interest for a week, and then a winner is randomly selected to receive the interest earned over one week from the entire pool, while the rest of participants receive back their initial investment. A user’s chance of being selected is commensurate with the proportion of his or her investment to the entire pool.

PoolTogether is using humans’ insatiable appetite for unexpected rewards to get them to do something that is important but boring (saving). Everyone joins the pool with the hope of winning the reward, but even if they lose, they save their initial investment.

And the rewards are getting bigger. There’s over $1m locked in the most recent pool ($250k is not eligible to win but subsidizes a bigger prize). PoolTogether dished out a $1400 prize to a lucky Ethereum address today, and with supply rates on Compound inching up thanks to the DSR hike, the prize (and attention on the project) is likely to grow further. Most interestingly, less than half of its traffic comes from English speaking countries (Indonesia and China, the biggest) according to CEO Leighton Cusack on Laura Shin’s Uncofirmed Podcast.

Social Trading at Set

Growing up, the easiest way to inspire me in sports and competition was to tell me how my brothers did. Comparing oneself to others is typically frowned upon but like gambling, it’s baked deep into the human psyche. Rather than try to fight it with will power, smart product designers are harnessing that urge to encourage a desired behavior.

Many friends now trade Apple Watch activity reports and the dopamine rush of beating a friend might power you to be more active during the week. And of course, Instagram and other social media platforms allow us to track our friends but also celebrities and people we want to emulate.

The automated asset manager, Set Protocol hopes to tap into this same psyche with the launch last week of the Set Social Trading Platform.

Sets are a smart basket of ERC20 tokens that can automatically rebalance according to certain parameters. The BTC ETH Equal Weight Set, for instance, automatically buys and sells WBTC or WETH to ensure that the Set is 50% ETH and 50% BTC.

On the Set Social Trading Platform, the same tools are used to create Sets that auto balance to the portfolio of a particular trader, be it friends and family or top influencers in the space.

The leaderboard gets the competitive juices flowing for traders, while retail investors gain the confidence of investing the same as a professional trader (or perhaps influencer is more apt here).

Go to market strategies

“Growth hackers” have long employed human psychology to attract new users by tapping into our inner fomo. Nothing motivates us like an opportunity closing and others capitalizing on it.

In crypto and DeFi, there have been some growth hacks, but the hurdle of downloading a wallet has always been difficult to overcome.

There was an interesting tactic employed last week by Maker and a new privacy encryption browser extension Maskbook for a free Dai giveaway. The campaign was targeted at Chinese users and was awfully similar to a WeChat campaign six years ago, which bears a deeper dive because of its crucial role in establishing WeChat pay as the juggernaut it is today.

Every Chinese Spring Festival, family members and friends exchange hongbao or “red envelopes”, which are filled with cash. Many companies even hand out bonuses to employees in a hongbao. Over the Spring Festival in 2014, WeChat, which was already the dominant messaging platform, rolled out a digital “hongbao”.

Instead of exchanging real envelopes with cash, anyone could send a digital one to any of their WeChat friends through the app’s nascent payment platform. Users were eager to connect their bank account (and identity) details to the app so they could take part in the holiday fun. In total, WeChat gained 100 million new users of its payment platform in a week, reaching critical mass for wider adoption.

During this Chinese Spring Festival, meanwhile, Maker and Maskbook, offered a Red Packet giveaway (sidenote: “hongbao” is so much better than “red packet/envelope”). The foundation tweeted out a link with an encrypted offer for a 100 Dai giveaway to the first 20 to claim a ticket. Users needed to download and install Maskbook in order to decrypt the link and claim the prize.

The UX was clumsy and there wasn’t much of a marketing push but the campaign tapped into a sense of fomo for those missing out on the drawing and also connected to a common activity (exchanging hongbaos).

Product design is seen by many as a silver bullet to mainstream adoption, but playing games and competing are just as motivating to humans as pretty objects.  

Chart of the Week: Stablecoins dominate ETH on Ethereum

A chart like this has been bouncing around since the use of Tether’s ERC20 token skyrocketed last summer, but it’s still an important chart that illustrates Ethereum’s value as a new financial system. Tether is obviously the biggest stablecoin and its success illustrates Ethereum’s penetration into mobile wallets. USDC, PAX, GUSD and TUSD represent a step forward for centralized exchanges, while scrappy Dai demonstrates that decentralization can find product-market-fit.

Odds and Ends

  • OasisDEX contract will be upgraded on Feb 8 Link

  • I took out a loan with cryptocurrency and didn’t sign a thing Link

  • Crypto accounting startup Gilded launches Open Finance Platform for businesses Link

  • OrFeed launches with own network of oracles + Kyber, Uniswap & Synthetix Link

  • Compound says copied its code without its permission Link

  • Dforce (owns to introduce yield enhancing protocol Link

  • Consensys: Ethereum by the Numbers — January 2020 Link

Thoughts and Prognostications

That’s it! Feedback appreciated. Just hit reply. Written in Brooklyn, where it’s not cold but I forgot my puffy coat.

Weekly Dose of DeFi is written by Chris Powers from Concourse Open. Opinions expressed are my own and do not necessarily reflect the opinions of Concourse Open. All content is for informational purposes and is not intended as investment advice.

DeFi Lending matures

Lending protocols, namely Maker and Compound, drove DeFi growth in the first half of 2019, but lending was also a 2019 success story for the broader crypto markets.

Genesis Capital and BlockFi generated significant revenue from crypto-backed loans, primarily using Bitcoin as collateral. For comparison, Genesis Capital, the largest centralized lender, had $870m of new loan originations in Q3 while the three largest DeFi lending protocols (Maker, Compound and dYdX) combined for $150m over the same time period.

The Arrival of MCD and the Dai Savings Rate

In November, Maker launched Multi-Collateral Dai and the Dai Savings Rate. The former was intended to grow the collateral base, while the latter was meant to encourage Dai usage and help manage the dollar peg.

Currently, there is $4.3m worth of BAT locked up as collateral in MCD against $1.6m in loans and $400m of ETH in Maker CDP/Vaults, which is being used to trustlessly lend $126m.

The BAT number is nothing to sneeze at. In addition to demonstrating the technical capability of multiple collateral, Maker has attracted 1.3% of all BAT in just 2 months – not too shabby.

In terms of ETH locked in Maker, the number in absolute terms has climbed to 2.48m ETH, up from 1.88m just before the launch of MCD.

The steady climb of ETH locked in Maker during this month’s price action suggests that Maker loans are used as leverage by traders (duh). Maker still has a $100m debt ceiling for Dai generated from ETH, so much of the overall increase in ETH locked comes from two Maker protocols – Multi-Collateral Dai (1.95m ETH & $100m Dai) and Single-Collateral Dai (550k ETH & $26m Sai). More stats at and

Dai in Secondary Lending Platforms

The more significant change, at least in the short-term, was the addition of the Dai Savings Rate. Prior to this, the only way to earn interest on Dai was through a secondary lending platform like Compound and dYdX. Maker hoped to capture this market and keep users on its Oasis finance portal.

And in this regard, Dai has been extremely successful. 40% of all Dai is now locked in the DSR, which has eaten into the marketshare of secondary lending platforms, as seen from this chart from Maker’s Primoz Kordez in the Our Network newsletter.

One can see introduction of the DSR in mid November and then a spike at the end of December in the Dai in DSR and a subsequent decline in dYdX and Compound’s share of Dai deposits.

While it may appear that Compound’s market share has suffered with the introduction of the DSR, it – along with Fulcrum – is using the DSR to generate yield for lenders on its platform.

Secondary lending platforms generate yield by charging interest on outstanding loans and funneling that to depositors, but as I wrote about in more detail last month, interest on Dai deposits on Compound and Fulcrum come from interest on outstanding loans and interest from the DSR for Dai that is not lent out.

For Compound and Fulcrum, the yield to lenders should never go below the DSR, while borrowers will pay slightly more than the Dai stability fee (or borrowing rate on Maker). As Compound’s founder Robert Leshner said, “MakerDAO will effectively control the interest rates of cDAI through the MKR voting process.”

dYdX, meanwhile, chose not to integrate the DSR into its trading platform. If Compound wants to maximize the yield given to lenders, dYdX prioritizes low interest rates for borrowers. It judges its success not from assets deposited, but from borrowing and trade volume. Whereas, Compound may only lend out 50-60% of deposits, dYdX has a utilization rate – the amount lent out divided by total supply – of 80-90%.

In this model, dYdX could have Dai borrowing rates lower than Maker because its rate is entirely determined by borrowing demand for Dai, rather than what MKR holders determine the borrowing rate. But if we imagine DeFi as an efficient market (not yet by any means), borrowing and lending rates should stabilize across platforms.

In fact, dYdX’s Dai rates were consistently lower than Maker & Compound throughout December and early January (the closest thing to free money) but are now in line with Maker’s stability fee. Here is a current snapshot of rates, supply and utilization across the three platforms.

While Dai is a decentralized stablecoin, the lending markets for the fiat-backed USDC are actually more market-driven because there’s no one setting a USDC borrowing rate (besides the Fed). It’s here where we can see the difference in the protocol’s design.

Fulcrum, like dYdX, aims for a high utilization rate, which leads to tighter spreads between the lending/borrowing rates.

Fulcrum and dYdX consistently have lower borrowing rates for USDC, although Compound’s decreased somewhat dramatically after it updated its interest rate model.

Lending protocols will continue to see fundamental changes to their design as they try to find a market niche. Three other lending snippets that are interesting:

  • DSR may be raised to almost 8%MKR holders are voting on whether to raise the DSR from 6% to 7.75% and raise the ETH and BAT stability fee from 6% to 8% in addition to a debt ceiling raise. The high DSR is likely a move by Maker to attract additional retail interest, but it should be an interesting test for how the increase will shake out across different secondary lending protocols, who are interested in keeping borrowing rates low, and how it will affect USDC rates.

  • Aave – a liquidity-based lending protocol like Compound or dYdX, but instead of a collateralized, indefinite loan, Aave has flash loans. Users must borrow, use and return the funds within the same transaction. These could be used for liquidations, rebalancing assets or whenever a large amount of capital is needed to unlock other assets. Aave’s aTokens are 1:1 with the underlying stablecoin. Interest is streamed to the account rather than through token appreciation, as Compound and Fulcrum’s cTokens and iTokens do.

  • Cherry Swap – If “double bonding curve liquidity pool as an automatic swap market maker” doesn’t get you excited, you might be in the wrong business. Cherry Swap is the trying to bring interest rate swaps to DeFi. CherryDai is an ERC20 that receives interest from an automated market maker liquidity pool offering swaps. Holders of the tokens are not betting on interest rates themselves, but funding a liquidity pool that does. Rho is a similar model but still in design phase.

Market Chatter

  • Slow week; returning to normalcy – crypto markets retreated for the week after two weeks of strong growth. ETH & Bitcoin dropped 7% in an hour and a half on Sunday, recovered for two days before a slow slide from Tues-Thursday. Notably, ETH gained on BTC during the slide as it decreased slower than BTC – a role that BTC typically plays in market retreats. ETH/BTC ticked up slightly over the past week to 0.192 ETH/BTC.

  • SNX struggles continue – in contrast to the broader market, SNX has declined 30% over the past month after tripling the previous three months. It hasn’t tracked BTC or ETH price increases, but instead price movements are triggered by SNX rewards claiming. SNX stakers can only receive trading fees and protocol inflation when their account is at 750% collateralization. It also announced (in its discord) that it would be delaying the Achernar upgrade, which was scheduled for January 30th and is supposed to add ETH as collateral.

  • Notable movers – there continues to be significant separation between smaller tokens and ETH/BTC. Augur (REP) nearly doubled two weeks ago before retreating but REP once again up 10% over past 24 hours. Augur is moving forward with their v2 launch and has seen an uptick in interest as the political season enters prime time. DeFi asset management protocol, Melon (MLN) has been moribund since….forever, but suddenly shot up 20% on Friday, perhaps after it was included in a Messari chart about DeFi returns. Kyber (KNC) also moved on Friday, up nearly 7%. It’s still a far away from 2017 highs (before it launched) but KNC has nearly doubled since it announced changes to its token economics in November.

Chart of the Week

The above chart by @0xLucas was in response to another chart that showed Bitcoin vastly outperforming “DeFi tokens”, but that chart did not include the two strongest performing DeFi tokens, SNX and LINK, and when included, the returns are much more promising. Still, MKR, KNC & ZRX all had a great 2019 in terms of development and adoption, but a bad year for their token prices. Full analysis at DeFi Rate.

Odds and Ends

  • Set unveils social trading platform to track public portfolios Link

  • Ethereum Classic a ‘better platform than ETH for DeFi projects’ Link 🤔

  • DeFi boom raises new questions for tax season Link

  • How MakerDAO flourishes in China Link

  • Tether to launch gold-backed token Link

  • Introducing Rocket: get a loan against your NFTs Link

  • DeFi Saver in 2019 — a year of building and growth Link

Thoughts and Prognostications

That’s it! Feedback appreciated. Just hit reply. Written in Nashville in the dead of winter.

Weekly Dose of DeFi is written by Chris Powers from Concourse Open. Opinions expressed are my own and do not necessarily reflect the opinions of Concourse Open. All content is for informational purposes and is not intended as investment advice.