Daily Archives: May 1, 2022

In mid-February 2020, the total value locked within decentralized finance (DeFi) applications first exceeded $1 billion. Fueled by the DeFi summer of 2020, it wouldn’t even take a year before it multiplied 20-fold to reach $20 billion and only another ten months to reach $200 billion. Given the pace of growth so far, it doesn’t seem outlandish to imagine the DeFi markets hitting a trillion dollars within another year or two.

We can attribute this monumental growth to one thing — liquidity. Looking back, DeFi’s expansion can be defined in three eras, each representing another significant development in removing barriers to liquidity and making the markets more attractive and efficient to participants.

DeFi 1.0 — Cracking the chicken and egg problem

DeFi protocols existed prior to 2020, but they suffered somewhat from a “chicken and egg” problem when it came to liquidity. Theoretically, someone could provide liquidity to a lending or swap pool. Still, there aren’t enough incentives for liquidity providers until there’s a critical mass of liquidity to attract traders or borrowers who will pay fees or interest.

Compound was the first to crack this problem in 2020 when it introduced the concept of farming protocol tokens. In addition to interest from borrowers, lenders on Compound could also earn COMP token rewards, providing an incentive from the second they deposited their funds.

It proved to be a starting pistol for the DeFi summer. SushiSwap’s “vampire attack” on Uniswap provided further inspiration for project founders, who began using their own tokens to incentivize on-chain liquidity, kicking off the yield farming craze in earnest.

Related: Liquidity mining is booming — Will it last, or will it bust?

DeFi 2.0 — Improving capital efficiency

So, that was DeFi 1.0, approximately the era that took us from $1 billion to $20 billion. DeFi 2.0, the period that saw further growth up to $200 billion, brought improvements in capital efficiency. It saw the growth of Curve, which honed Uniswap’s automated market makers (AMM) model for stable assets, offering more concentrated trading pairs with lower slippage.

Curve also introduced innovations like its vote-escrowed tokenomic model, which incentivizes liquidity providers to lock up funds for the long term to further increase the reliability of liquidity and reduce slippage.

Uniswap v3 also brought further improvements in capital efficiency with its customizable liquidity positions. Beyond Ethereum, the multichain DeFi ecosystem began to flourish on other platforms including BSC, Avalanche, Polygon and others.

So, what will propel DeFi through the next phases of growth to reach a trillion dollars and beyond? I believe there will be four key developments.

DEXs go hybrid

The AMM model that’s proven so successful in DeFi evolved out of necessity after it became evident that Ethereum’s slow speeds and high fees wouldn’t serve the order book model well enough for it to survive on-chain.

Related: Automated market makers are dead

However, the existence of DeFi on high-speed low-cost blockchains means that we’re likely to see an uptick in the number of decentralized exchanges (DEXs) using an order book model. Fast settlement times reduce the risk of slippage, while low to negligible fees makes an order book exchange profitable for market makers.

There are several examples of decentralized exchanges using central limit order books emerging already — Serum, built on Solana, Dexalot on Avalanche and Polkadex on Polkadot, to give several examples. The existence of order book exchanges is likely to make it easier to onboard institutional and professional investors, as they allow limit orders, making for a more familiar trading experience.

Cross-chain composability

The proliferation of DeFi protocols on blockchains other than Ethereum has resulted in significant fragmentation of liquidity into different ecosystems. To some extent, developers have tried to overcome this with bridges between blockchains, but recent hacks such as Solana’s Wormhole bridge hack have created concerns.

Nevertheless, secure cross-chain composability is becoming necessary to unlock the fragmented liquidity in DeFi and attract further investment. There are some positive signs — for instance, Binance recently made a strategic investment into Symbiosis, a cross-chain liquidity protocol. Similarly, Thorchain, a cross-chain liquidity network, launched last year and has recently gained rapid ground in value locked, implying a clear appetite for cross-chain liquidity.

Blockchain and DeFi begin to merge with the financial markets

Now that crypto is becoming a recognized global financial asset, it’s only a matter of time before the boundaries begin to blur with blockchain and DeFi. This is likely to move in two directions. Firstly, by bringing the liquidity from the established global financial system on-chain, and secondly, by the adoption of crypto-related decentralized financial products by institutions.

Several crypto projects have now launched institutional-grade products, and more are in the pipeline. There’s already a MetaMask Institutional wallet, while Aave and Alkemi operate Know Your Customer (KYC) pools for institutions.

On the other side, Sam Bankman-Fried is flying the flag for bringing the financial system on-chain. In March, he spoke at the Futures Industry Association in Florida, proposing to U.S. regulators that risk management in financial markets could be automated using practices developed for the crypto markets. The tone of the FT piece covering the story is telling – far from the dismissive, even scornful attitude that the traditional financial press used to have toward crypto and blockchain, it’s now loaded with intrigue.

Quite when DeFi reaches the trillion-dollar milestone is anyone’s guess. But, those of us watching the current pace of growth, investment and innovation feel reasonably confident that we’ll get there sooner rather than later.

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 author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

While the community was witness to the largest NFT mint yet, Ethereum (ETH) gas prices rose to unprecedented levels, in addition to users experiencing failed transactions due to blockchain bottlenecks.

Bored Ape Yacht Club creator Yuga Labs launched a sale of Otherdeed non-fungible tokens (NFTs) that represents digital land deeds on their new venture, the Otherside metaverse. With each piece of land selling at 305 ApeCoin (APE) or nearly $5,800 at the time of the sale, Yuga Labs made $319 million after 55,000 NFTs sold out almost instantly.

The Otherdeed NFT mint is sold out – we are awestruck at the demand shown tonight. Apes and Mutants, the opening of the 21-day claim period is being delayed until the price of gas drops to reasonable levels. We’ll tweet when the claim opens. https://t.co/iRz64lklbv

— OthersideMeta (@OthersideMeta) May 1, 2022

While the Otherdeed NFTs could be minted only in APE, it also required ETH for gas fees. The minting mechanics set by Yuga Labs envisioned the sale of NFTs in phases while anticipating a momentary rise in gas prices, which would then decelerate the number of users minting the NFTs:

“This pattern of mint → bump limit → mint → bump limit will continue until NFT supply is exhausted. This approach is expected to prevent an apocalyptic gas war, while also encouraging as broad a distribution as possible.”

The above screenshot was shared by Redditor u/jeux99 sharing their experience on high gas fees at the time, asking:

“Why is gas $450 right now??? I’ve seen high gas fees, but nothing like this before!”

As rightly pointed out by another Redditor, u/johnfintech, Etherscan data shows that numerous users paid anywhere between 2.6 ETH ($6500) to 5 ETH ($14000) as gas fees.

Citing some of the issues related to using Ether during its NFT launch, Yuga Labs stated:

“We’re sorry for turning off the lights on Ethereum for a while. It seems abundantly clear that ApeCoin will need to migrate to its own chain in order to properly scale.”

For those that lost their ETH holdings in gas due to failed transactions, Yuga Labs has promised to refund the gas amount back to the users.

Related: Vitalik Buterin proposes calldata limit per block to lower ETH gas costs

Ethereum’s infamous gas fees have been a long-standing concern among the community owing to the influx of ecosystems hosted by the blockchain, including NFTs.

In Nov. 2021, Ethereum co-founder Vitalik Buterin proposed a new block-wide limit on the total transaction calldata to decrease the overall transaction calldata gas cost over the ETH network.

While the community embraced the suggestion, it took over four months to implement EIP-4488 on the Ethereum-sidechain testnet on Geth. Community member Qi Zhou confirmed on 27th April about plans to upgrade the testnet within a month.

Eurozone’s monetary authority, the Eurosystem, is looking to enlist financial companies willing to develop front-end solutions for the digital euro. The plan is to carry out a “prototyping exercise” this year to test transactions to the back-end developed by the regulator.

Eurosystem to Select Front-End Providers for Digital Euro Project

Within the ongoing investigation into the possible issuance of a digital euro currency, the Eurosystem intends to conduct an experiment which will, among other objectives, test end-to-end transactions with the central bank digital currency (CBDC), the European Central Bank (ECB) announced before the weekend.

The authority, which consists of the ECB and the central banks of the eurozone members, is looking for parties interested in offering front-end prototypes for the trials. Transactions will start at their front-end prototype and will be processed through the interface into the back-end, both developed by the Eurosystem.

Payment service providers, banks, and other relevant companies have been invited to participate as front-end providers of technical solutions designed to facilitate digital euro payments. The deadline for their applications is May 20. The prototyping exercise is scheduled to start in August and may continue until the first quarter of 2023.

The goal is to gather a pool of front-end providers with which the Eurosystem will cooperate in the development of user-facing prototypes, the announcement detailed. The authority will invite potential participants to explain the use cases for their prototypes. A limited number of providers, up to five the Eurosystem said, will then be selected.

They will sign contracts with the financial authorities of the eurozone and will be expected to organize the prototype development. Throughout the process, the providers will be able to share their feedback on the Eurosystem interface and back-end infrastructure, including by presenting specific data requirements to support a certain business model.

The project to launch a digital version of the common European currency entered its investigation phase in October, last year. In February, news came out that the European Commission is planning to propose a bill laying down the legal foundation for the currency early next year. Fabio Panetta, a member of the Executive Board of the ECB, recently stated that the bank is focusing its efforts on the digital euro.

Do you expect other initiatives to test the digital euro platform in the near future? Tell us in the comments section below.

Lubomir Tassev

Lubomir Tassev is a journalist from tech-savvy Eastern Europe who likes Hitchens’s quote: “Being a writer is what I am, rather than what I do.” Besides crypto, blockchain and fintech, international politics and economics are two other sources of inspiration.