DeFi Research News October 2022

In this edition of our monthly Research News Update, Here are the topics we discuss:

  • Key DeFi TVL Stats
  • El Salvador update
  • State of the Inflation
  • Recession fears persist
  • Geography of Cryptocurrency Report by Chainalysis
  • KPMG Study On Family Offices and HNW Individuals
  • Fidelity Institutional Survey Shows Growing Appetite to Buy Crypto
  • FASB Recommends Favorable Accounting Standards for Crypto on Balance Sheet
  • SBF’s Proposed Digital Assets Industry Standards Create a Storm Amongst Crypto Community
  • CFTC Chair Says Ether Is a Commodity
  • The Monetary Authority of Singapore proposes banning crypto trading with borrowed capital
  • Elon finally bought Twitter while Jack Dorsey is working on its decentralized alternative, Bluesky Social
  • Hong Kong plans to make retail crypto trading legal
  • $700M in Short Liquidations
  • A16z’s flagship crypto fund lost 40%
  • Coinchange’s 3-2-1 QnA Podcast launched two important episodes related to institutional and regulatory updates in crypto
  • Ethereum and Bitcoin Update. Bitcoin Miners Suffer
  • A look at the top DeFi protocols based on the revenue generated

DeFi TVL Updates

Key DeFi Stats for October:

The past month has seen no real uptick in TVL nor in Borrowing demand, leading to decreased rates across Money Market Protocol. According to DeFi llama earlier in October, the DeFi TVL was ~$54 Billion. By October 31st, it was ~$54.85 Billion. Basically in dollar terms, TVL has been moving sideways. 

Among the protocols, MakerDAO still tops the list at an average TVL of ~$7.7 Billion over the past 30 days followed by Lido Finance at $6.2 Billion. Curve maintained its #3 spot this month as well at $5.9 Billion in TVL. Last month Uniswap was at the #4 spot with $5.3B but this month it slid to the #5 spot at only $4.9B. AAVE overtook Uniswap at #4 with $5.3 Billion in TVL. 

Source: Token Terminal

Macro View

State Of The Inflation

The year-over-year figures have a local top in place for headline inflation, but core inflation continues to grind higher. The month-over-month figures show the issue more clearly; core CPI is 0.58% month over month which means even just recently, that would translate into 7% year-over-year CPI if it were to continue for a year.

Source: U.S. BUREAU OF LABOR STATISTICS, All Items, Not Seasonally Adjusted

Did I Hear Recession?

Back in May, the 10yr-2yr briefly inverted and then un-inverted. Starting in July, the 10yr-2yr re-inverted and remained persistently inverted since then, and this past week the 10yr-3mo curve has inverted as well. 

The past 8 recessions in the US have all been preceded by a 10yr-3mo yield curve inversion, and that particular curve has not given any false-positive signals.

El Salvador update: Amidst inflation all over the world, glooming recession in the west, and decreased industrial output in the east, El Salvador so far has been doing quite well according to this article by Bitcoin Magazine. In 2021 alone, their GDP rose 10.3%, income from tourism rose 52%, employment went up 7%, new businesses up 12%, exports up 17%, energy generation up 19%, energy exports went up 3,291%, and internal revenue went up 37%, all without raising any taxes. And this year, the crime and murder rate has gone down 95%.

Regulations and Institutional Update

KPMG Study On Family Offices and HNW Individuals: According to the October 2022 Investing in Digital Assets Study by KPMG, of 30 family offices and HNW individuals, 58% reported skin in the crypto game while a further 34% intend to allocate funds to bitcoin, stablecoins, and ether, as well as DeFi opportunities. 

Fidelity Institutional Survey Shows Growing Appetite to Buy Crypto: According to Blockworks article on October 27th, Fidelity institutional survey shows that the appetite for diving into digital assets among big finance companies has been growing citing 74% of institutions plan to buy crypto.

FASB Recommends Favorable Accounting Standards for Crypto on Balance Sheet: On October 12, 2022, the Financial Accounting Standards Board (FASB) tentatively recommended that companies report certain crypto assets and digital currencies at fair value. This means ones the new rules are implemented, companies can report the current average market value of BTC in their filings. This is a game changer for many who are holding back due to the current rules which force them to report the lowest value in the quarter. 

SBF’s Proposed Digital Assets Industry Standards Creates a Storm Amongst Crypto Community: Sam Bankman Fried posted ‘Possible Digital Asset Industry Standards’, a draft of a set of standards that we as an industry could enact to create clarity and protect customers while waiting for full federal regulatory regimes. It triggered a firestorm on Twitter with Erik Voorhees, the CEO of ShapeShift writing Money & State OpEd with his counterarguments to SBF’s post. The two later hashed it out live on the Bankless podcast with the majority of the crypto community leaning on Eric’s side.  

CFTC Chair Says Ether Is a Commodity while alluding that SEC chair Gensler might consider it a security. Gensler suggested that the fixed-income-like returns of staking ether is consistent with securities classifications. It remains to be seen who wins this classification. 

The Monetary Authority of Singapore proposes banning crypto trading with borrowed capital. In an effort to safeguard consumers, they published two consultation papers regarding how the Payment Services Act might regulate stablecoin issuers and providers of Digital Payment Tokens. Retail crypto investors would be prohibited from using "any form of credit or leverage in trading DPTs" under the proposed new rules.

Other Noteworthy News/Events in October

Elon finally bought twitter which is great news that sent DogeCoin up 91%. What’s interesting is that Binance contributed $500M to the takeover bid, which will only contribute to the assumption that blockchain and Twitter will become increasingly interconnected. In similar news, Jack Dorsey and his team will launch a decentralized alternative to Twitter called Bluesky Social which has been in the works for quite sometime now since 2019. They are accepting private beta users and aim to become a competitor to Twitter. 

Geography of Cryptocurrency Report by Chainalysis: Chainalysis published ‘The 2022 Geography of Cryptocurrency Report’ on crypto adoption around the globe highlighting the top 5 countries for crypto adoption Vietnam, Philippines, Ukraine, India, and the United States. India ranked #1 in most categories such as Centralized services and DeFi but lagged in the P2P exchange trade volume.

Hong Kong plans to make retail crypto trading legal: As per this Bloomberg report, Hong Kong plans to make retail crypto trading legal, looking to reestablish its reputation as a global financial hub. This is an interesting contrast to China's trying to ban any crypto-related activities. 

$700M in Short Liquidations: Crypto markets had over $700M in liquidations on short trades, reaching levels not seen since July 2021.

A16z’s flagship crypto fund lost 40% in the first half of 2022 as per Wall Street Journal article.

Coinchange’s 3-2-1 QnA Podcast Update

Coinchange released two podcasts in October. Our first episode was with Nick Kuriya from Purpose Unlimited who is behind the first global Spot BTC and ETH ETF. He explains why the US is lagging behind on a spot crypto ETF and talks about the role of Stablecoins. And the second podcast was with Paul McCaffrey from KBW about institution adoption and regulations. Our upcoming episode with SUN ZU Labs focuses on how transparency in the liquidity metrics in crypto & the best execution venue for trading are paramount for institutional money and how it relates to regulations. 

On-Chain Metrics & Data

Ethereum Update

October has been a disinflationary month for Ethereum since the rate of supply growth has been trending downwards almost making it deflationary since it switched to POS. link

On the other hand node operators and especially relayers are enforcing OFAC sanctions on blocks that are compliant with OFAC rules. Potentially creating an attack vector for regulators to sanction Ethereum. 

All blocks included

Only looking at relayed blocks (blocks with MEV)

While it is still possible to conduct non-OFAC-compliant transactions, this trend of centralization concerns a significant portion of the Ethereum community. This is already above the threshold that would cause protocol-wide base layer transaction censorship if OFAC-compliant validators ever stopped attesting to non-OFAC-compliant blocks (which they aren't currently doing, but could change at any time).

Bitcoin Update

Bitcoin continues to be range-bound.  Bitcoin volatility currently is so low that it has acted almost like a stablecoin this month, hovering in a very narrow band around $19,000. 

The longer-term metrics suggest it’s in a pretty deep value zone, but the market continues to face a lot of near-term risks as the Fed continues to tighten monetary policy into an economically-decelerating environment. 

Bitcoin Miners Suffer: While the bitcoin price has been stagnant in recent months, the hash rate on the network has gone vertical. The hash rate is the total amount of application-specific processing power on the network being used to process transactions and secures the network via Proof of Work consensus. In other words, it means that there is more competition for the same value reward. This is a particularly bad combination for existing miners because it means they get fewer bitcoins each. The biggest public miner, Core Scientific (CORZ) had to sell most of its bitcoin a while ago, and last week issued a bankruptcy warning.

Lightning Update

Over 40M Cash App users can now send and receive bitcoin lightning payments. Previously, Cash App users could only send BTC Lightning payments, but through a new integration, users can now also receive BTC directly into their Lightning wallets.

A look at the top DeFi protocols based on the revenue generated

Analyzing to whom the Dapps revenue benefits the most depends on the revenue share model that each of them has in place. Dapps can distribute part or none of this revenue in an automatic manner to their stakeholders. OpenSea or Metamask are examples of platforms that do not distribute protocol revenue to their token holders since they don’t have one in the first place. On the other hand, Pancakeswap, dYdX, Synthetix, or LooksRare distribute it in various ways, the most common way being governance token staking reward. While those governance tokens could potentially fall under securities law, it is still a meaningful way to understand the real economic driver of some DeFi applications.

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