Cointelegraph By Guest Authors
Following the explosive growth of decentralized finance in the second half of 2020, we’re asking ourselves what the next chapter will look like. What would it take for DeFi to expand beyond crypto-native assets and communities and start eating financial services as we know it?
The second half of 2020 surpassed many of our expectations, and the market has only accelerated since then. Total value locked in DeFi rose from less than $1 billion at the start of June to $13 billion at the end of the year and over $27 billion since then. Catalyzed by Compound’s COMP token launch, we saw a wave of yield farming and a rapid inflow of assets.
Related: Was 2020 a ‘DeFi year,’ and what is expected from the sector in 2021? Experts answer
Perhaps more excitingly, we’ve started to see the foundations of a new financial system taking shape — with applications that enable everything from self-custodial exchanges to lending and borrowing, payments, portfolio management and insurance. New forms of value are being created: not just the promise of yield in a low-rate environment but also access to financial services for crypto-exposed businesses and individuals and for the underbanked more generally.
Today, DeFi is the preserve of a small subset of crypto-native users and assets and is seen by its critics as the wild west. Will this change? Here are a few thoughts on what comes next.
New asset types — New sources of liquidity in DeFi
The first iterations of decentralized exchanges were fraught with liquidity issues. Early adopters faced a significant lag in order matching, and token pairs were limited. Automated market makers and liquidity pools have become a widespread solution to this, with daily trading volumes on decentralized exchanges currently on the order of $2 billion — and DeFi projects continue to find innovative ways to incentivize the provision of liquidity. This will continue. For borrowers, we believe there remains a clear need to bring down collateralization requirements and indeed to use alternative forms of collateral.
Perhaps the greatest opportunity lies outside the universe of crypto-native assets. There are trillions of dollars of potential collateral up for grabs in real-world assets: Users want to borrow money against the assets that they already have and often cannot access the liquidity they need by conventional means. Tokenization of real-world assets can dramatically increase the size of the DeFi universe.
Scaling issues addressed at layer one and/or layer two
Ethereum’s scalability constraints are often cited as a factor limiting the adoption of DeFi. High gas prices and indeed high Ether (ETH) prices can render lower-value transactions unviable. This limits the attractiveness of nonfungible token marketplaces and other retail-focused services. Meanwhile, high-frequency professional trading requires layer-two solutions due to limited on-chain transaction throughput.
Related: Second layers will save the day in 2021, bolstering Ethereum and DeFi
It’s plausible that we’ll see this resolved in 2021, with at least three possible paths:
- The successful rollout of Ethereum 2.0.
- The emergence of dominant layer-two scaling solutions on Ethereum.
- Widespread adoption of cross-chain interoperability solutions.
These three phenomena need not be mutually exclusive, and they collectively give us optimism that 2021 will be a year of significant progress on DeFi scalability.
Institutional demand — Convergence between CeFi and DeFi
We are beginning to see crypto-native institutional investors seek higher yields via stablecoins. Many of these investors use centralized exchanges, at least initially, but a handful of institutional-focused self-custodial products has emerged. Regulatory scrutiny on DeFi is likely to increase as these services gain traction.
Meanwhile, regulators around the world have enacted stricter rules for virtual account service providers, such as centralized crypto exchanges. The Financial Action Task Force’s travel rule and Europe’s 5th Anti-Money Laundering Directive demonstrate the movement toward stricter Know Your Customer standards in cryptocurrency, and October’s BitMEX charges brought this into sharp relief. This will ultimately touch DeFi: In the near term, we expect to see institutional products implementing pseudonymous/zero-knowledge solutions for self-sovereign identity.
There are ideological and practical questions that need to be addressed. Is KYC fundamentally incompatible with DeFi? And which regulatory frameworks actually apply to DeFi today and in the future? Trustlessness will be defined subjectively, and we’ll see a spectrum from truly decentralized products — built and used by anonymous users outside the purview of the Bank Secrecy Act — to products with a database of verified counterparties.
Better UXs for retail participants: DeFi that doesn’t feel like DeFi
For many users, the on-ramp into DeFi is simply too steep. A certain degree of sophistication is needed simply to set up a MetaMask wallet, buy ERC-20 tokens, and start lending. Meanwhile, many centralized products have grown thanks to intuitive interfaces resembling traditional digital banking products. We are now starting to see this trend play out in DeFi where one could ultimately enjoy a faster, cleaner onboarding experience, given the lack of KYC. As a good example, Yearn.finance was a pioneer in this regard, focusing on usability and lowering the barriers to entry that existed before its launch.
Adjacently, other Ethereum-based applications — such as NFT marketplaces for collectibles and digital assets — will continue to innovate the user experience. In 2021, we expect to see a wider emergence of Ethereum-based applications where customers do not know they are transacting on a blockchain at all.
More exploits as more capital flows in: Potentially the biggest constraint to growth
Given the increasing amount of capital at stake, it’s unsurprising that we have seen a rise in exploits. In 2020, approximately $100 million was lost in hacks, notably flash loan attacks, and this trend is likely to continue. For institutional investors, exploits will inevitably alter the perception of DeFi’s risk-adjusted yield opportunities.
Related: Roundup of crypto hacks, exploits and heists in 2020
This will be a critical factor influencing the scale of adoption and will bring a rise in demand for smart contract auditing and insurance, both of which have seen limited investments to date. Greater collaboration between DeFi projects is also a potential response to the rise in exploits. Such partnerships will allow projects to pool and strengthen their talent, security and treasuries, helping to prevent and mitigate the impact of future exploits.
The rise of crypto in the last decade has transformed the way we think about stores of value. The rise of DeFi in 2020 transformed the way we think about the future of financial services and true innovation in a space that changes very slowly. As the dust settles on a remarkable 2020, we now expect to see a massive increase in scale and professionalization as DeFi captures more regulatory and institutional attention.
This article was co-authored by Toby Coppel and Chandar Lal.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.
The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Toby Coppel is a co-founder and partner of Mosaic Ventures, which invested in various projects across Europe. The Future of Money is one of their core investment themes. Toby was previously the chief strategy officer of Yahoo.
Chandar Lal is a research associate at Mosaic Ventures, where he conducts thematic research and due diligence. He previously worked at Sequoia in Silicon Valley as part of the corporate development team.
BTC, UNI, THETA, VET, LUNA
Cointelegraph By Rakesh Upadhyay
Bitcoin’s (BTC) fundamentals received a boost as the U.S. Senate passed the $1.9 trillion stimulus bill on March 7. If traders react to this bill in the same way as they had done to the first stimulus package in April 2020, then the crypto markets may witness a strong rally.
The stimulus package also intensifies the focus on the devaluation of the U.S. dollar. These concerns could lead some investors to park their money in hard assets or Bitcoin instead of keeping them in fiat currencies, according to veteran trader Peter Brandt.
In addition to investors, a growing number of listed companies are choosing to protect their fiat reserves by buying Bitcoin. After the high-profile purchases by MicroStrategy, Tesla, and Square, a Chinese listed company called Meitu revealed that it had acquired $40 million worth of Bitcoin and Ether.
If other companies across the world also follow this lead and invest a portion of their treasury reserves in Bitcoin, that could create a massive supply and demand imbalance, sending prices through the roof.
Let’s study the charts of the top-5 cryptocurrencies that may resume their uptrend in the short term.
Bitcoin dipped below the 20-day exponential moving average ($48,484) on March 5 and March 6 but the long tail on each candlestick shows buyers are ready to jump in at lower levels. The bulls have currently pushed the price toward the $52,040 overhead resistance.
While the 20-day EMA is flat, the relative strength index (RSI) has started to turn up and it has risen above 58, indicating that the bulls are attempting to make a comeback.
If the buyers can propel the price above the resistance, the BTC/USD pair may retest the all-time high at $58,341. A breakout of this level could start the next leg of the uptrend, which may reach $72,112.
Contrary to this assumption, if the price turns down from the overhead resistance and breaks below $46,313, the pair may drop to the 50-day simple moving average at $42,861. This level is likely to act as a strong support.
If the pair rebounds off this support, the pair may spend a few more days in consolidation. But if the bears sink the price below $41,959.63, traders may rush to the exit, which could signal a possible change in trend.
The pair has formed an inverted head and shoulders pattern on the 4-hour chart that will complete on a breakout and close above $52,040. This bullish setup has a pattern target of $61,075.
The 20-EMA has started to turn up and the RSI has jumped above 62, indicating a minor advantage to the bulls.
This bullish view will invalidate if the price turns down from the current levels or the overhead resistance and breaks below $47,000. Such a move could open the doors for a decline to the next major support at $41,959.
After consolidating near $29 for three days, Uniswap (UNI) has broken out of the overhead resistance today. If the bulls can sustain the price above $29, it will enhance the prospects of the resumption of the uptrend.
Both moving averages are sloping up and the RSI is in overbought territory, which indicates that bulls are in command. If the UNI/USD pair rises above $33, the next level to watch out for is $38 and then $46.
This bullish view will invalidate if the price turns down from the current levels and breaks below the 20-day EMA ($25.31). If that happens, the pair may drop to $22 and then to the 50-day SMA ($19.78).
The 4-hour chart shows that the bears are likely to defend the $32 overhead resistance aggressively. However, if the bulls do not allow the price to dip below the 20-EMA, it will signal strength. A breakout and close above the $32 to $33 zone may start the next leg of the up-move.
This bullish view will invalidate if the price turns down and breaks below the 20-EMA. Such a move will suggest that traders are booking profits on rallies. The pair could then drop to the 50-SMA.
THETA is in a strong uptrend. Although the altcoin turned down on March 7, the long tail on the March 8 candlestick shows buying at lower levels. Corrections in a strong uptrend generally last for one to three days after which the main trend resumes.
The rising moving averages and the RSI near the overbought zone suggest the bulls are in control. If buyers can drive the price above $4.72, the THETA/USD pair may resume the uptrend and rally to $5.73.
On the contrary, if the price turns down from the $4.50 to $4.72 overhead resistance zone, the pair may drop to the 20-day EMA ($3.58). A strong rebound off this support will suggest the sentiment remains positive as the bulls are buying the dips.
If the bears sink the price below the 20-day EMA, a deeper correction to the 50-day SMA ($2.82) is possible. Such a move will indicate that the momentum has weakened and may delay the resumption of the up-move.
The 4-hour chart shows the 20-EMA is rising and the RSI is in the positive zone. If the bulls can push and sustain the price above the downtrend line, the pair may retest $4.72. A breakout of this resistance could start the next leg of the uptrend.
On the other hand, if the price continues to correct, it may find support at the 20-EMA. If that happens, the bulls will again try to propel the price above the downtrend line. However, a break below the 20-EMA may pull the price down to $3.85.
VeChain (VET) is currently stuck in a large range between $0.0345 and $0.060774. The price had reached the resistance of the range, but the long wick on today’s candlestick shows profit-booking near $0.060774.
However, the moving averages are sloping up and the RSI has also inched higher into the positive territory, suggesting that the path of least resistance is to the upside. If the bulls can push and sustain the price above $0.060774, the VET/USD pair may start the next leg of the uptrend.
The first target on the upside is $0.087048 and if this level is also crossed, the pair may rise to $0.10.
Contrary to this assumption, if the price turns down from the current level, the pair may drop to the 20-day EMA ($0.047). A bounce off this support will suggest that the uptrend remains intact, but a break below it may bring the range-bound action into play.
The 4-hour chart shows some profit-booking near $0.060, but the positive sign is that the bulls have not allowed the price to collapse. If the pair rebounds off the 20-EMA, the bulls will make one more attempt to thrust the price above the stiff overhead resistance.
If they can sustain the price above $0.060774, the next leg of the uptrend could begin. However, if the price dips below the 20-EMA, the selling could intensify and the price may drop to the next support at the 50-SMA.
Terra (LUNA) is currently consolidating in a large range between $5 and $8.50 for the past few days. Both moving averages are sloping up and the RSI is near the overbought territory, indicating the path of least resistance is to the upside.
The bulls pushed the price above the range on March 5, but could not build up on the breakout as the price turned down and slipped back below $8.50 on March 6. This suggests that demand dried up at higher levels.
However, if the bulls do not give up much ground, it will indicate that traders are waiting to buy the shallow dips. If that happens, the buyers may make one more attempt to start the next leg of the up-move. If they succeed, the LUNA/USD pair could rally to $12.
The long wicks on the candlesticks above $8.50 show profit-booking at higher levels and the bulls are currently attempting to defend the 20-EMA. If the price rebounds off the current levels, the buyers will again try to resume the uptrend by driving the pair above the $8.50 to $9 overhead resistance zone.
On the contrary, if the bears sink and sustain the price below the 20-EMA, the pair could dip to the 50-SMA. If the price bounces off this level, the pair may consolidate in the upper half of the range for some time. A drop below the 50-SMA will be a signal that the price may settle into the $5 to $6 range.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk, you should conduct your own research when making a decision.
What gives Ether token its value?
Cointelegraph By Benjamin Pirus
Bitcoin holds the top spot as the world’s first and largest cryptocurrency. The coin carries worth based on its position as a store of value capable of transacting value globally and comparatively easier than other similar assets, such as gold. Ethereum’s asset, Ether (ETH), has a different value proposition, arguably valuable for a number of reasons.
“Ethereum derives its value from a number of different factors, including gas fees, its usage as collateral, its ability to be lent and borrowed, its use as a medium of exchange for trading and NFTs [nonfungible tokens], and the fact that it can be staked for interest,” Scott Melker, a crypto trader and the host of The Wolf Of All Streets podcast, told Cointelegraph, adding: “It also has speculative value and is gaining increased attention and interest from institutional investors.”
The backstory behind Ethereum
Ethereum is the network on which its tradable coin, ETH, runs. Ethereum launched in 2015 based on a concept from a programmer named Vitalik Buterin roughly two years prior. In short, Ethereum acts as a platform on which developers can build projects or solutions.
The Ethereum network has become a staple in the crypto space over the years, with many projects based on it. A large number of initial coin offerings used Ethereum in 2017 as a funding vehicle. Crypto assets based on Ethereum’s blockchain are called ERC-20 tokens, although ERC-721 tokens also exist as nonfungible tokens built on the network.
When a project builds on Ethereum, it may come with an asset for use within that ecosystem. That asset would likely be an ERC-20 token. It is not uncommon, however, for projects to switch over to their own mainnet blockchain after launching initially on Ethereum’s blockchain.
Much of the decentralized finance sector of crypto also began on Ethereum, with decentralized exchanges based on Ethereum’s blockchain hosting trading for numerous tokens associated with the niche. DeFi lets participants borrow and lend crypto assets, among other capabilities. As noted by Melker, ETH can play a part in this ecosystem.
Ethereum transaction costs called gas fees
Part of ETH’s value relates to gas fees. Whenever a person sends ETH, they must pay a certain amount of the coin to pay for the transaction — a similar concept to the fees users pay when sending Bitcoin (BTC).
A big difference with ETH, however, is that sending ERC-20 tokens incurs gas fees. To send an ERC-20 token, the transactor must also hold ETH in the same wallet to pay for the transaction. Trading on DEXs also comes with gas fees. Someone might buy and hold ETH for gas fees, giving the coin a base level of demand in the market.
During the DeFi boom of 2020, Ethereum’s network saw high traffic, spiking gas fees to exorbitant levels. High transaction fees continued into 2021. Based on data from YCharts, an average ETH transaction cost $39.49 in February 2021 — significantly higher than levels recorded in years prior. A fee of around $1–$2 would be considered normal. “Ethereum Average Transaction Fee measures the average fee in USD when an Ethereum transaction is processed by a miner and confirmed,” YCharts notes on its site.
The asset’s possible speculatory value
Speculation may have its part in ETH’s value as an asset. Investors may buy ETH coins as a bet on the Ethereum network’s possible future success and adoption into the mainstream world. ETH’s price could possibly also represent speculation on the success or failure of a portion of the crypto industry, given the number of projects built on the network.
Tyler Winklevoss, co-founder and CEO of the Gemini crypto exchange, expressed this thought process in an interview with Casey Adams, an entrepreneur and podcaster, in December 2020. Winklevoss compared crypto industry innovation to that of the internet, although investing in a small portion of the internet during its early years, other than through roundabout methods, would have proven difficult.
Buying ETH arguably offers that type of fractional investment of a broader developing sector. Winklevoss explained by comparing such a purchase to hypothetical partial race track ownership, which would profit more on activity rather than on individual race results.
“Ether is the same thing for indexing a piece of the Ethereum network, which is a […] decentralized global computer,” he said. “A lot of people equate Ether to digital oil,” he added. “If you want to get into the crypto game, my suggestion is own some Bitcoin, digital gold, and own some Ether, digital oil, and with those, you have most of your bases covered.”
Value in Ethereum 2.0
Ethereum’s scaling has been an issue, as seen with the CryptoKitties fad in 2017, and with the DeFi craze that began in 2020. Ethereum 2.0 aims toward a faster experience, but the upgrade is a process and has seen delays.
Eth2 includes the network’s transition to proof-of-stake technology, which hinges on ETH holding at least some level of price value, according to Aditya Asgaonkar, a researcher at the Ethereum Foundation.
“Proof-of-stake operates on the premise that if validators do something bad — if they are trying to attack the system or misbehaving in some way — then they’ll be penalized,” he said during an LA Blockchain Summit panel. “These penalties apply to their stake, which is in the coin ETH, so ETH price has to be, like, greater than zero for the penalties to have any kind of effect in terms of incentive,” he added.
Therefore, validators need a 32-Ether stake to take part in backing the network. Validators that help run the blockchain in a PoS system are paid out for the amount of contribution to the network provided by them. Demand generated by validators accumulating Ether in batches of 32 and the desire to earn yields from staking creates market demand for the coin.
In light of the competitive crypto market, Binance Smart Chain has surfaced as one of the alternatives. The network acts similarly to Ethereum, except BSC uses Binance’s BNB coin for transaction costs instead of ETH, according to Binance Academy’s explanation of BSC.
Other network competitors include Cardano, Neo and many others. Over the years, the prospect of usurping Ethereum’s network has been a hot topic. Surpassing Ethereum in prevalence would be significant, given Ethereum’s wide usage.
Due to the large number of applications, products and services built on Ethereum, it also benefits from something called the network effect. “The network effect is a phenomenon whereby increased numbers of people or participants improve the value of a good or service,” Investopedia explains, adding: “The Internet is an example of the network effect. Initially, there were few users on the Internet since it was of little value to anyone outside of the military and some research scientists.”
“However, as more users gained access to the Internet, they produced more content, information, and services. The development and improvement of websites attracted more users to connect and do business with each other. As the Internet experienced increases in traffic, it offered more value, leading to a network effect.”
Essentially, the more something is used and built on, the more prevalent it becomes, similar to a wave, gaining momentum as it goes. In the case of Ethereum, the network effect means added trust as the platform is well known and prominent.
In the ever-changing world of crypto, assets rise and fall in popularity and price. Over the years, ETH has shown price strength as well as dominance as a platform on which developers can build. Time will tell, however, if a faster and cheaper network will usurp Ethereum in the long run, or if Ethereum 2.0 will scale the blockchain to meet market demand.
DeFi summer 2.0? ‘Gen 2’ tokens on a tear amid wider market slump
Cointelegraph By Andrew Thurman
As some brand-name decentralized finance (DeFi) tokens sputter, a crop of new projects have emerged that are catching strong bids on the back of aggressive yield farming programs, generous airdrops, and significant technical advances.
It’s a set of outlier projects pushing forward on both price and fundamentals that has led one crypto analyst, eGirl Capital’s mewny, to brand them as DeFi’s “Gen 2.”
feels like theres a gen 1 and gen 2 of defi tokens now
the former is stagnant and the latter is pamping
has nothing to do with fundamentals. its all psychological
— mewny (@mewn21) March 6, 2021
Mewny, who in an interview with Cointelegraph pitched eGirl Capital as “an org that takes itself as a very serious joke,” says that Gen 2 tokens have garnered attention due to their well-cultivated communities and clever token distribution models — both of which lead to a “recursive” price-and-sentiment loop.
“I think in terms of market interest it’s more about seeking novelty and narrative at this stage in the cycle. Fundamental analysis will be more important when the market cools off and utility is the only backstop to valuations. Hot narratives tend to trend around grassroots projects that have carved out a category for themselves in the market,” they said.
While investors might be eager to ape into these fast-rising new tokens, it’s worth asking what the projects are doing, whether they’re sustainable, and if not how much farther they have to run.
Pumpamentals or fundamentals?
The Gen 2 phenomena echoes the “DeFi summer” of last year, filled with “DeFi stimulus check” airdrops, fat farming APYs, and soaring token prices — as well as a harrowing spate of hacks, heists, and rugpulls.
However, mewny says that there’s a population of investors that emerged from that period continuously looking for technical progress as opposed to shooting stars.
“There are less quick “me too” projects in defi. An investor may think that those projects never attracted much liquidity in the first place but they overestimate the wisdom of the market if that’s the case. They did and do pull liquidity, especially from participants who felt priced out or late to the first movers.This has given the floor to legitimate projects that have not stopped building despite the market’s shift in focus. ”
One such Gen 2 riser pulling liquidity is Inverse Finance. After the launch of a yield farming program for a forthcoming synthetic stablecoin protocol, the Inverse Finance DAO narrowly voted to make the INV governance token tradable. As a result, the formerly valueless token airdrop of 80 INV is now priced at over $100,000, likely the most lucrative airdrop in Defi history.
Another Gen 2 star is Alchemix — one of eGirl Capital’s first announced investments. Alchemix’s protocol also centers on a synthetic stablecoin, alUSD, but generates the stablecoin via collateral deposited into Yearn.Finance’s yield-bearing vaults. The result is a token-based stablecoin loan that pays for itself — a new model that mewny things could become a standard.
“eGirl thinks trading yield-bearing interest will be an important primitive in DeFi. Quantifying and valuing future yield unlocks a lot of usable value that can be reinvested in the market,” they said.
The wider markets appears to agree with eGirl’s thesis, as Alchemix recently announced that the protocol has eclipsed half a billion in total value locked:
It is our one week anniversary today, and wow!
That was fast! 500 MILLION TVL!
Farms: 322.85m pic.twitter.com/FQsezs6s9q
— Alchemix (@AlchemixFi) March 6, 2021
By contrast, governance tokens for many of the top names in DeFi, such as Aave and Yearn.Finance, are in the red on a 30-day basis. But even with flagship names stalling out, DeFi’s closely-watched aggregate TVL figure is up on the month, rising over $8.4 billion to $56.8 billion per DeFi Llama — progress carried in part on the back of Gen 2 projects.
The comparatively wrinkled, desiccated dinosaurs of DeFi may have some signs of life left in them, however. Multiple major projects have significant updates in the works, including Uniswap’s version 3, Sushiswap’s Bentobox lending platform, a liquidity mining proposal working through Aave’s governance process, and Balancer’s version 2.
These developments could mean that DeFi’s “Gen 2” phenomena is simply a temporary, intra-sector rotation, and that the “majors” are soon to roar back. It would be a predictable move in mewny’s view, who says “every defi protocol needs at least 1 bear market to prove technical soundness.”
What’s more, according to mewny some of the signs of market irrationality around both Gen 2 tokens as well as the wider DeFi space — such as triple and even quadruple-digit farming yields — may be gone sooner rather than later.
“I don’t think it’s sustainable for any project in regular market conditions. We are not in regular conditions at the moment. Speculators have propped up potentially unsustainable DeFi protocols for a while now.”
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