Alethio DeFi Research Report for the First Quarter: DeFi Future Prospects under Two Rounds of Death Tests
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1. Overview of DeFi data in the first quarter
Open Finance operates through smart contracts that automate the execution of new, blockchain-based financial instruments. The amount of "locked" funds is usually a key indicator for measuring the success of DeFi products. "Locked" funds are funds sent by users into the smart contract. The growth of "locked" funds represents the growth of users' confidence in DeFi.
Funds locked in DeFi can be assessed in two ways: locked ETH and locked USD.
1. The locked ETH comes from the amount of ETH and WETH sent to the smart contract.
2. Locked USD indicates the dollar value of the asset locked in the DeFi smart contract. The locked USD is directly related to the market price of Ethereum. Even if the amount of ETH locked in DeFi remains the same, as the price of ETH changes, the value of locked USD will increase or decrease.
ETH locked in DeFi
Since the beginning of 2019, the amount of ETH locked in DeFi has been increasing, with most of it coming from Maker and Compound. Maker's dominance in terms of ETH locked is due to its presence and role in the earliest days of DeFi in 2018.
Maker is the enabler of a new wave of financial protocols that rely on a decentralized stablecoin: SAI. When Maker issued SAI, it was effectively the only DeFi participant using this stablecoin. Therefore, the increment of ETH locked by DeFi is mostly concentrated in Maker's contract.
Starting in mid-2019, a new wave of DeFi projects began to emerge, many of which use the SAI stablecoin. Maker continues to hold the upper hand when it comes to the amount of ETH locked, but newer projects are starting to eat away at its market dominance by devising new ways to leverage SAI (and now Multi-Collateral DAI).
On January 30th, the Ethereum community witnessed the highest amount of ETH locked in DeFi projects: 31,786,95 ETH. 81% (2.5 million) of locked ETH came from Maker (MCD + SCD), and 12% (376,000) came from Compound.
Two events in Q1 affected the amount of ETH locked in DeFi: the bZx event and Black Thursday (Figure 2). In terms of impact on locked ETH, the bZx event on February 18th had a bigger impact than Black Thursday. From February 18 to February 19, the total amount of ETH locked in DeFi decreased by approximately 175,000, a decrease of approximately 5.8%.
After the successive breaches of the bZx protocol, the reduction in the number of locked ETH shows that a considerable number of DeFi users are still wary of the security of the DeFi protocol. For some market participants, flash loans, and the subsequent misuse of economic incentives in cryptocurrencies, have eroded confidence in DeFi. This is reflected in the fact that after the flash loan incident, the ETH locked in all DeFi projects has declined, not just bZx.
Global markets crashed on Black Thursday, which affected the value of almost all existing assets. Cryptocurrencies were not immune either — the prices of ETH and BTC dropped more than 40% in less than 24 hours. Although the cryptocurrency market and traditional markets are not always correlated, it seems reasonable to conclude that the sharp decline in cryptocurrency prices is caused by the same factors that caused the stock market crash: fears of the new crown virus infection and the price of oil.
After Black Thursday, the drop in ETH locked in DeFi was smaller than that caused by the bZx event. The total amount of locked ETH dropped by 2.69% from March 12 to 13, compared to a 5.8% drop from February 18 to 19. However, the gradual impact of Black Thursday is more serious. The week after March 12 saw a 12.2% decrease in total ETH locked, while the week following February 18 saw a 7.8% decrease in locked ETH.
While the amount of ETH locked fell sharply in February and March, at the end of the first quarter, the amount of ETH locked was not much different from a quarter ago. The likely conclusion is that the DeFi ecosystem as a whole may have crossed an important threshold of “no returns” sometime in the past two quarters. While individual projects have been challenged (discussed later) and some consumers have lost confidence, the ecosystem as a whole has remained resilient even in the face of severe stress.
USD locked in DeFi
DeFi once again made headlines this quarter, with the value of ETH locked in Ethereum DeFi protocols hitting $1 billion on Feb. 6. About 64% of it comes from ETH or WETH, and about 36% comes from ERC-20 tokens.
One possible problem with calculating USD prices for ETH and ERC-20 is double counting. If the user locks ETH in Maker and then locks the generated DAI in Compound, then calculating the locked dollars in ETH and ERC-20 will calculate the locked ETH and DAI at the same time, and the actual amount locked is only the original ETH.
On February 6th, the USD value of WETH and ETH alone was close to $650 million. By February 15th, it had increased to just under $850 million (the USD value of ETH and ERC-20 was about $1.1 billion at the time). Whether counting ERC-20 tokens or not, February saw an all-time high in locked USD value (ETH was trading below $300 at the time).
Current status of DeFi projects
The development of DeFi projects can be properly evaluated by three data: the number of locked ETH, the number of unique addresses, and the volume of user transactions. Through these three figures, we can see the development of different DeFi projects in the first quarter.
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2. MakerDAO MCD
On November 18, 2019, MakerDAO's Multi-Collateral DAI (MCD) was officially launched. It marks the most anticipated milestone for the largest DeFi project to date.
Before November 18th, MakerDAO only allowed users to use ETH as collateral to obtain the SAI stablecoin. The November upgrade will allow users to acquire the new DAI stablecoin using multiple forms of collateral, including ETH. During this upgrade process, SAI holders can exchange their SAI for new DAI at a ratio of 1:1. SAI still exists, but the community will vote to disable it at some point to ensure the DeFi community continues to function as a multi-collateral system.
The staking options in the new platform are not set in stone. They are "scalable", meaning that collateral types can be added (or removed) through the Maker governance process. Before Black Thursday, the collateral types provided by the MCD platform were ETH and BAT. Following the March 17 vote, MKR holders accepted USDC as a third collateral.
On December 17th, more than 50% of the SAI in circulation had been successfully migrated to DAI. The migration of SAI to DAI performed well until late February, then stalled, after which the total supply of DAI decreased. The large drop in DAI supply was mainly due to liquidations triggered by the drop in ETH price.
The graph below shows the MKR price in USD and the MKR burn rate. As the price of ETH fell on March 12, the sudden surge in liquidations led to a sharp increase in the previously stable MKR burn rate. The increase in MKR burns is due to the use of liquidated DAI to buy and burn MKR. However, the trading volume was not enough to protect the MKR price from falling (from $500 on March 11 to $200 on March 16).
The graph below demonstrates the correlation between liquidation volume and ETH price. Historically, peaks in total liquidations (red) have coincided with declines in ETH prices (green). However, the amount liquidated is not always proportional to the amount liquidated in PETH (orange).
The turmoil on the Maker platform was caused by false oracle prices and severe network congestion, making it possible to bid 0 yuan to bid for the mortgaged 62,000 ETH (worth about 7 million US dollars).
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3. Compound v2
Launched in May 2019, Compound v2 is the next iteration of the Compound DeFi platform. Since then, Compound v2 has played an important role in the DeFi ecosystem, as shown by the amount of ETH locked in the platform and the number of users.
4. Uniswap
4. Uniswap
Uniswap emerged as the leader in the decentralized exchange market in late 2019 and solidified its position last quarter. In the first quarter of 2020, a total of 2.7 million ETH/WETH were traded on Uniswap, and the transaction on March 13 alone accounted for 13% of the total transaction volume. While it was a tough day for the Ethereum ecosystem, it was a big moment for decentralized exchanges. Within 24 hours, the amount of ETH traded on the Uniswap platform was 8 times the February high.
Of particular note is the growing trading of stablecoins during the market turmoil in March:
• On January 6th (the highest trading volume in January), 27.1% of the trading volume on that day was DAI and USDC. • On February 14th (the highest trading volume in February), 17.0% of the trading volume on that day was DAI and USDC.
• On March 13th (the day after Black Thursday, 80.8% of the trading volume on that day was DAI and USDC.
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5. Looking to the future: DeFi in 2020
Watch Point: Locked ETH
Locked ETH decreased in the last two months of the first quarter of 2020, a marked departure from an upward trend that has lasted for more than a year. Despite this reduction, it's essentially only 'shrunk' by a quarter, which is about the same as the amount of ETH locked in late 2019. We expect this data uptrend to normalize as people continue to use DeFi after the bZx and Black Thursday shocks.
Focus: DeFi Insurance
For the Ethereum ecosystem, the performance of DeFi in the first quarter is important. bZx and the events of Black Thursday revealed the growing importance of an important component in DeFi: insurance. Two protocols in particular, Nexus and Opyn, demonstrate the complexity and diversity of the insurance category to DeFi consumers. Nexus is a company more focused on smart contract vulnerabilities. Opyn, an insurance platform that launched on Feb. 12, just days before bZx's first event, expanded its coverage from technical risks to "financial risks such as liquidity crises."
After the events of bZx and MakerDAO, people are concerned about whether the project will slow down the development of the ecosystem due to risks. But Nexus and Opyn counteract it and give users a way to protect themselves from potential vulnerabilities in the protocol.
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Disclaimer: This article is the author's independent opinion, and does not represent the position of the Blockchain Institute (public account), nor does it constitute any investment opinion or suggestion. This article has been deleted without changing the original intention.
original:https://cdn2.hubspot.net/
Disclaimer: This article is the author's independent opinion, and does not represent the position of the Blockchain Institute (public account), nor does it constitute any investment opinion or suggestion. This article has been deleted without changing the original intention.
