The Breakdown - Why DeFi Is Surging As The Market Pumps

Episode Date: January 15, 2020

Crypto tokens weren’t the only thing that saw a major pump yesterday. The total value locked in DeFi ascended to new heights. While part of this can be explained simply by the rise in ETH price, it also reflected traders turning to DeFi platforms as a way to get more exposure to the market action without selling their core assets.  For all the exciting price action, not everything is pointing in a positive direction. These market moves don’t seem to reflect new market participants, for example, and anecdotally, times remain tough for projects trying to fundraise.  In our final segment, we look at a blockchain conference in North Korea that the UN suggests simply attending may violate international sanctions, an Iran-focused hedge fund that uses cryptocurrency to work around international restrictions, and ask whether this sort of activity presents a narrative risk to the industry as a whole?

Welcome back to The Breakdown, an everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond, with your host, NLW. The Breakdown is distributed by CoinDesk. Welcome back to The Breakdown. It is Wednesday, January 15th, and we are going to be talking first today about Defi, what it did during the rally yesterday and what it might look like for Defi's interplay with the rest of the industry throughout this year. Second, we're going to almost have a cautionary tale and look at what's going on from a slightly different lens and ask whether this rally is really the banner headline or whether there's still big questions for the industry underlying. And third, and finally, we're going to look at a story coming out of the UN warnings about a Korea- or North Korea-based blockchain conference and ask about an emergent or maybe perhaps

better put underlying narrative around rogue state money and ask to what extent we should be worried about this. But first, let's dive in on Defy. So yesterday at 10 a.m., Defy Pulse tweeted out, new all-time high for Defy, strap in because the year has just begun. They pointed out a graph that said 739.5 million had been locked in Defy. That number continued to rise throughout the day. Camilla Russo, who runs The Defiant, wrote,

1 billion held in defy by quarter one, TVL approaching 800 million today, a record driven by ETHUSD rally, but also by net increase of assets locked. So what's going on? Part one of the rise in defy simply has to do with the Ethereum price. The value of USD locked in Defy, if we're denominating that in Ethereum, is going to rise naturally as the price of Ethereum rises. But the second part of the story is about the way that people were using Defy as a way to go participate in other parts of the market as they started to soar. So yesterday, Brady Dale on Coin desk wrote, traders turned to defy to capitalize on Tuesday's crypto market spike. And basically, you know, he discusses this first part as well that obviously there's going to be a price increase

when the price of Ethereum goes up. But there's more than that. This article goes into how platforms like compound finance saw a huge influx of resources yesterday. They say compound, which provides an easy way for ETH holders to borrow saw a surge in usage Tuesday with collateral rising about 10%. Similarly, volume on uniswap, the decentralized token swapping gap, is up almost 100% over the day before. Maker Dow has also seen a large jump nearing 50 million, likely because traders are locking up ETH to create dye they can trade with. So that's basically the idea here, is that if you want to go get exposure to other things happening in the market, in the short term, but you don't want to go sell your actual underlying ETH holdings.

One of the ways that you can do that is by locking it up in these smart contracts, taking the dye or whatever the asset is that you can then go trade on the markets with without ever having to give up your exposure to Ethereum. So this is really interesting. One of the themes that I'm seeing come up over and over this year is infrastructure being built that allows people to stay long-term exposed to crypto assets, whatever their crypto asset of choice, while actually using it in the short term, be it for trading or something else. I think that one of the more thriving segments in this industry is these

organizations like Nexo, like BlockFi, like Celsius, like Crypto.com, that allow people to lock up their assets and actually get other forms of more liquid assets back that they can use to go do whatever it is that they want. In fact, one of the themes that we're going to be talking about today, and I think recurringly is really to what extent this will be a continuation of last year's infrastructure building year. So when I did my end of year breakdown podcasts, one of the folks who was on was Pritha Kasseretti, who runs True Story. And her argument was that 2019 was a much more behind-the-scenes building year than we really give it credit for. And she thought that 2020 was going to be more of the same. Now, the interesting thing is when we see huge price appreciations like we did

yesterday, it kind of smacks that out of the way, especially when you see the sort of brazy pumping and growth that seems to only be possibly explained by incredibly low liquidity, just making numbers shoot up much higher than they would with a more liquid asset, right? Which is, I think, the case for things like BSV yesterday. I think that those types of pumps actually sometimes distract from the larger frame setting around where we are. So where are we? Well, let's look to a slightly different take on what's going on right now. This is a tweet from Maya Zahavi. She writes,

There might be a rally in Alts, but all I hear on the Israeli scene is crypto startups closing and not funding rounds. Same for crypto funds. Nick Carter responds saying, Last gasp desperation rally before a big token die-off led by exchanges getting penalized, in my opinion, we're not getting another 2017.

So what these folks are talking about is this weird disconnect between, on the one hand, these numbers shooting up and this rally that we've seen over the last couple weeks, but especially the last couple days, is in contrast with the general sentiment, which has felt, I believe, pretty low and dreary is too strong a word maybe, but it's been very flat. The markets have felt flat. It hasn't felt like lots of new people are coming in and getting excited. It's felt like there's been news for sure, but nothing that's going to drive mass groups of participants in. In fact, what we've been seeing as it relates to the drivers of the

news cycle have much more to do with these slow, steady increases in the institutional infrastructure for the way that people interact with top flight assets. And what I mean by that is things like crypto derivatives, options trading. We saw CME's options on Bitcoin futures open up yesterday. We're seeing others get in that game as well. And that was validated. Sue from Three Arrow's Capital wrote yesterday near record volume on BTC options. I expect this record to be broken several time over the course of the coming year. This is the type of thing that we're seeing. You know, Arthur Hayes from Bitmex wrote an article about crypto derivatives yesterday. Binance is continuing to push out new derivatives products. The momentum in the industry is very much not on these

alt coins, some of which are pumping ridiculously over the last couple days, and very much in the way that people are participating in the markets around really, really core assets. But that still isn't necessarily all good signals, right? We are seeing slow, steady growth around things like Bitcoin futures trading, obviously, which is great to see. But there are other key parts of that institutionalization or financialization of Bitcoin that are still lagging, most notably an ETF. Just this morning, CoinDesk posted that Bitwise had withdrawn its most recent ETF application. Now, this isn't exactly surprising. The SEC had previously rejected the proposal in October, and were simply reviewing the rejection in the wake of it. So this withdrawal is,

it's not like a new proposal that had gone through answering that previous set of concerns. The concerns, of course, were things like market manipulation, the inability to prevent elicit activities, the core fundamental underlying things that the SEC needs to be confident. in a Bitcoin ETF. Bitcoin ETFs were also the subject of a conversation on CNBC's ETF Edge on Monday, where there was kind of a difference of opinion in terms of how likely a Bitcoin ETF was to be approved. The CEO of ETF Trends, Tom Liden, put that number at 60%, while a couple of the other panelists

put it at closer to 10%. One of those other commentators, Bob Pisani, who's from CNBC, put it like this. quote, they still haven't figured out that. Remember, you're not dealing with the CFTC here. This is not futures, different people. The SEC is terrified grandma is going to buy a Bitcoin ETF that is going to collapse and five years later, all the people running the SEC are going to get hauled in front of Congress and get asked, are you the guys who approved grandma buying the Bitcoin ETF? So that's obviously the concern is the general conservatism and nervousness of the SEC. Of course, again, the point of this isn't just about a Bitcoin

ETF or any one particular piece of institutional infrastructure. Now, the point of all this actually doesn't really have to do with ETFs. I'm not trying to make a point about the Bitcoin ETF or predictions of when it's going to happen. My broader point is that we are seeing right now a rally on everything, all of these crazy long-tail alt projects that don't even probably have people working on them anymore. And my point is that we need to, especially in the context of that sort of action, really remind ourselves of where the energy and attention in the space is now. All of that energy that was just splashed all over the ICOs and this idea of tokenized the world has now found root and found home

in a small handful of areas. You do see a concentrated group who are focused on defy. You do see, as we talked about last week, a very concentrated group who are looking at DAWS. You have a number of these new contender smart contract platforms that are trying to improve upon what Ethereum does and be a better base level platform. But that in and of itself is infrastructural. And then everything else is around Bitcoin, is around these very top flight assets,

and what different people can do with them, what markets can do with them, what traders can do with them, how people can be on boarded to use them, right? We don't live in the long-tail alt-season world anymore. And I think that's my key point. I also, I guess, want to say that I agree with Maya's sentiment going right back to the beginning of the section, that to me, this rally feels anomalous with the attitude that I was seeing. I haven't watched any new group of people flood in that would account for why there's such a big run-up, right? This isn't, it doesn't feel like new money coming in, and it doesn't

necessarily suggest anything about the overall health of the markets. It just suggests that the money is pumping, and there's a set of reasons why that might be. This isn't to be completely dreary about this. In fact, this morning I tweeted out an article from the Wall Street Journal that showed that this was the best January since 2012, or it made some argument like that. That was the headline, at least. And it's nicer to see, obviously, that set of headlines than it is to see, you know, X number of millions lost in an exchange hack. So I don't want to look a gift horse in the mouth. I just want to be real and thoughtful and conscientious about what it actually means and what it says about this year. I continue to believe that we are still

in a building year and infrastructure year. And of course, there are numerous catalysts, numerous different types of black swan events that could propel a huge amount in. The narrative of Bitcoin as a safe haven continues to grow in the context of larger geopolitical events. In fact, coin metrics who has been tracking this narrative from a data perspective yesterday in their newsletter

said that the Iran situation has provided effectively the best evidence of the narrative of Bitcoin as a safe haven asset in its 11-year existence. So there are plenty of things that could change and catalyze this market. But right now, I'm just saying, I think that what we've been seeing over the last couple days is more of an anomaly than it is a reflection of the overall health of the market. And lastly, today, I actually want to talk just a little bit about that macro geopolitical narrative, although from a slightly different lens.

So the UN has warned about the risks of attending a big, North Korea-based cryptocurrency conference. So Reuters reported today that going to the event, just simply going to the event, would be a violation or most likely be a violation of international sanctions according to a confidential report that is about to be put before the UN Security Council. This will not come as a surprise to anyone who's been watching the news around Virgil Griffith, who is an Ethereum developer who was arrested and then indicted over attending the conference and giving a talk last year. He has been charged with conspiracy

to violate the International Emergency Economic Powers Act. And for the UN, there's good reasons for this, right? North Korea has been accused of basically funding its WMD programs with cryptocurrency hacks. That was another big headline from last year. The question that I wanted to ask is about the narrative of rogue state money and what that potentially does for cryptocurrencies. There has been a conversation going on within

the cryptocurrency industry if what it is best at, if its actual killer app is evading economic sanctions, is censored transactions, which includes economic sanctions. This came up again today in the Market's Daily newsletter of the portion written by Joe Wisenthall. So Joe Wisenthal has been talking about this concept of whether the most important point of Bitcoin is its ability to get around censored transactions, echoing themes that we heard from Jill Carlson in her end of year piece for Coin desk last year, and whether there's some inherent contrast between that, on the one hand, and this emergent financialization. He wrote today about the conversation that he had with a London-based fund manager who invests in the Tehran, obviously in Iran, stock exchange.

So this is a quote from the piece. Joe says, responding to a question about sanctions and the difficulty of moving money in and out of the country, he brought up on his own what he sees as the rising use of cryptocurrencies in the contrary to circumvent banking restrictions. It was notable for two reasons. One is, as mentioned above, here was someone who was not a crypto person bringing it up unprompted in a serious manner. And secondly, this is probably the quintessential use case for them, circumventing laws that tell people what they can and can't do with their money. So while I think that many in the space overstate their own impact and importance, nuggets like this strike me as significant. I'm interested in the dangers of this narrative becoming more dominant. So you have

this UN report about attending a conference. You have folks talking publicly on Bloomberg about how they use cryptocurrencies to move money in and out of Iran, which is obviously a country non-grata in the U.S. in a big way. You have congresspeople like Brad Sherman who use the context of things like the Libra hearings, to make the point that this money is just for terrorists and drug dealers and other criminals, and who say that the first time that you see a bombing or a terrorist act paid for with Bitcoin, people are going to stop supporting the whole movement. This is a dangerous narrative, I think, or it's a dangerous narrative to let it be the only narrative. And I'm interested to see how it evolves in the context of the Iran situation, in the

context of our ongoing debates with North Korea and certainly in the context of our ongoing conversation with China. So this is a narrative to watch in the sense that I think it has important implications for how these crypto assets are received in the U.S., from the U.S. on a governmental level. So today, at least, more of a flag than anything concrete, but something that I think is worth keeping an eye on. With that, we'll wrap up. Thanks, guys, for listening. back tomorrow with more breakdown goodness. Cheers, everyone.