DeFi Weekly #49

Crypto Derivatives and The Ethereum Narrative.

Latest this week

  • Crypto derivatives are starting to achieve escape velocity and there’s no way to deny it. During the recent ETH Boston and the previous ETH Global event I think we saw at least 5-10 projects working on some form of DeFi derivatives which manage the risk/fluctuations in DeFi interest rates. The closest to something being a full blown project is CherrySwap (https://cherryswap.now.sh/) - a crisp user interface with functional tech. I know there’s plenty of others such as SwanDAI, LSDAI but the idea around all of these is we’re slowly moving past the idea of betting on prices, but betting on the interest rates of this highly sophisticated economy with diverse motivations. We’ll start seeing a lot of these new players (but also existing players working on this in the background) come out in the next 6 months. All of this is going to be ripe for the next bull run since people’s optimism in the price going up will lead to even more being lent out. Right now, the state of economy is a dip in ETH prices, leads to hikes in increase rates. The core relation is ETH being used as collateral to mint/borrow stable coins and then lenders taking the other side. However lending or borrowing ETH at the moment is relatively unattractive option (sub 1% interest rates). However what happens when ETH hits $1000? Do you…

  • 1) Lend your ETH out to earn even more (interest rates will be higher due to much higher borrow demand from shorts)?

  • 2) Borrow stable coins against ETH to get more leverage or lend out your ETH at a fixed-rate no lock-in option (if you think it’ll keep going up this can be very lucrative)?

  • 3) Cash out as much as you can and then lend your hard earned bull market money to highly attractive short-term interest rates?

  • Each choice varies in terms of risk, but the point being illustrated here is the complexity around what to do with your money increases and so does the type of activity happening in the market. This isn’t even the climax though. When we have more liquidity in assets outside of ETH/DAI on Ethereum (BTC, synthetic real world assets) etc then we multiply these opportunities far more than we can ever imagine. The one thing which won’t change is the fact that ETH will be the reserve asset to power all of this innovation, which brings me to my next point.

  • ETH fundamentals are stronger than ever, and the market is completely ignoring it. I’m pretty biased in my opinion about ETH but it seems that what was obvious to a core set of believers in the past 12 months is slowly starting to reach the conscious of the wider crypto community. Before we get into details it’s worth taking a step back and examining how we got to where we are right now. In the 2017 bull run, Ethereum single handedly validated the product-market fit for a general purpose computing platform with a code-base adapted from the Bitcoin protocol which was largely stagnant. Before 2017, no one really knew that was something you actually needed. Imagine pitching a VC a protocol which: wanted to raise $18m, didn’t have product (just a white paper), unproven team (no Stanford/Google badges), a distributed team and a ton of regulatory concerns. Hard pass for sure. Now after the price of ETH went from $0.35 to $1,200 in a few years, you can image the FOMO that ensued in chasing similar 3,400x opportunities (with full liquidity). That rush was called the “2017 ETH Killers”. Teams behind these projects had what Ethereum didn’t have: credentials, centralised teams, equity up for purchase, regulatory guidelines and most importantly - ground-floor prices. Coupled with crypto kitty network failures and a very strong incentive to back their own horses, Ethereum developed a narrative of the AOL of crypto which will die to chains with better technology. Only one problem emerged over the course of the next 2-3 years: no one outside of early VCs actually cared about what they were building. Why did no one care?

  • 1. Terrible returns for the everyday person. A big reason why Bitcoin and Ethereum have such strong communities and histories because they changed the financial lives of millions of internet strangers. 2017 ICO killers only gave returns to VCs.

  • 2. Better technology != more devs. Just because a chain is faster, that doesn’t mean the developers will come. Developers go to the place where the likelihood of developing an end user application is the highest. Now you can’t just launch a chain and hope devs come, you need stable coins, browser extensions, terrific dev tooling and so much more. MV-Chain isn’t really possible.

    Oh and did I mention plenty haven’t launched? The ones which have been listed are already seeing their prices fall due to extreme sell pressure from early investors. So why does all of this matter? Because eventually the demand for DeFi services will outstrip any artificial narrative crafted. Algorand, Cosmos, Hashgraph have all had a very rough time after launching and no where close to threatening Ethereums’ dominance. It’s just a matter of time before price reflects what’s really going on:

On Chain Statistics

  • Total Locked in DeFi: $569M (ATM ETH high).

  • Biggest Gainer: Synthetix up by another $10m reaching $50m locked up.

  • Interesting Stat: Uniswap has stalled for the past few months. The sentiment amongst many people is that large trades are extremely expensive and should be avoided. Let’s see what v2 comes up with.

Project Updates

  • We rolled out AirSwap Trader earlier this month. Since then, the wider-blockchain community has given us a lot of positive feedback: Weiss Crypto Ratings, Token Economy, CryptoNinjas, and more. AirSwap Trader is the first shareable, trustless escrow with no deposits, no counterparty risk, and no trading fees. Give Trader a try

  • All streamed segments of the most recent #AirSwapNext have been uploaded to the AirSwap YouTube page. Protocols, Products, Build a Maker, Liquidity, and the Tokenized Asset Portfolio (TAP) segments are all viewable here

  • AirSwap is teaming up with Ethereal Summit and Gitcoin for the Ethereal Blocks virtual hackathon. Each winning submission takes home 2000 DAI. Come check out our bounties.

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