Gas Prices Decline and USDT growth outside of Ethereum

Plus Odds & Ends and Thoughts & Prognostications

Tweet of the Week: Gas Price chatter

Talking about gas prices on Ethereum is like talking about the weather in the real world. Gas prices were in the teens over the weekend and even during Monday’s U.S. business hours, prices hovered around mid 50s GWEI. Hasu lays out the three explanations succinctly. #2 & #3 seem like the main culprits, in part because of the economic or arbitrage opportunity they are exploiting. Those transactions are willing to pay gas prices that are orders of magnitude higher than the typical DeFi or Ethereum transaction.

Fees will be high whenever there are juicy arb opportunities to be found, which is why James Prestwich is skeptical of the gas savings from L2, arguing “[In DeFi], arb gas usage expands to fill the available chainspace”.

Chart of the Week: USDT growth on T ron

I saw this on Twitter and it made me do a double take, but yes, Tether has grown faster on T ron than on Ethereum, where its circulating supply is almost twice as big USDC ($13.7bn).

Although it has a lot of users, T r o n is not a hot bed of DeFi activity - but neither has Tether (USDT). Tether has grown because it is the stablecoin of choice amongst OTC desks and exchanges, like Binance and FTX. Originally, most Tether was issued on Omni, a Bitcoin sidechain, but issuance shifted to Ethereum in 2019, but high gas fees have likely pushed Tether’s trader- and exchange-based activities to a lower-cost option, T ron.

Tether continues to be a dominant force in crypto, with a significant but not outsized impact on Ethereum. This type of activity may also migrate to Ethereum Layer 2’s as they come online. In other Tether news, it started trading on Coinbase Pro last week.

Odds and Ends

  • Coindesk: MKR passes $4k as Maker brings on real assets Link

  • Balancer deploys V2 contracts to mainnet, plus 1000 ETH bug bounty Link

  • Archer Swap aims to bypass MEV, prevent front-running Link

  • Loopring’s Ethport tries to enable L2 -> L1 transaction/calls Link

  • Aave introduces liquidity incentives for Aave v2 Link

  • DexGuru raises $1m Link

  • Optics is a new cross-communication design from Celo Link

Thoughts and Prognostications

That’s it! Feedback appreciated. Just hit reply. Written in Brooklyn. Hope everyone and their family are safe and healthy, thinking particularly of India today. More problems with substack links. Think it’s Tron….

Dose of DeFi is written by Chris Powers. Opinions expressed are my own. I spend most of my time contributing to DXdao*. All content is for informational purposes and is not intended as investment advice.

Coinbase and DeFi

Plus the weekend's free fall and Dai finds stability

In all likelihood, last week was peak exposure for Bitcoin, Ethereum, DeFi and crypto as a whole. Coinbase’s direct listing coming amidst all-time highs for cryptocurrencies and a host of other narratives from DOGE’s inexplicable rise to the explosion of digital art and NFTs.

The obvious parallel is Netscape’s IPO in 1995, which legitimized the growing web ecosystem and was public investors’ first taste of the booming internet market. Netscape was a harbinger of the explosive growth of the internet, but in the end, it did not become a core pillar of the internet (AOL acquired Netscape for $10bn in 1999).

The Coinbase listing will achieve similar things for blockchains and cryptocurrencies as the Netscape IPO, but will Coinbase follow the same path as Netscape or can it pivot to the new landscape that it is creating?

Framework’s Vance Spencer lays out what that could look like:

Liquidity Unleashed

So much of finance is sourcing liquidity for large transactions and capturing arbitrage opportunities. These also drive the DeFi world, but liquidity is not siloed in a single exchange, since the protocols are transparent and permissionless. DEX aggregators like 1inch are able to offer best pricing by accessing liquidity pools across Ethereum.

In the traditional or centralized world, best execution systems achieve this by splitting orders across multiple exchanges, but in DeFi this is different for two reasons:

  1. In traditional finance, large investors invest in building proprietary best execution systems, but in DeFi, liquidity is permissionless at the protocol level, so all DeFi users have equal access different liquidity sources (note: this is changing with rising gas prices and the growth of MEV).

  2. In DeFi, liquidity can be in more than one place. Okay, that’s not exactly true, but in traditional finance if you want to put your assets to work by lending or market making, you give them to a custodian/prime broker for that explicit purpose. In DeFi, you can deposit funds in a smart contract and then program that the funds should be used for different activities depending on market conditions. Or perhaps more accurately, others use the funds based on the defined parameters. (Check out more in last month’s post DeFi: The Liquidity Revolution)

Spencer posits that DeFi’s permissionless liquidity will spell the end of centralized orderbook exchanges like Coinbase, especially as new AMM designs like Uniswap’s V3 and Balancer v2 make AMM liquidity provisioning as capital efficient as orderbook exchanges.

This framing shows why the Great Orderbook vs. AMM Debate of the last year was so misguided. As blockchains scale and smart contract innovation continues, these lines blur and the real battle will be between global, permissionless financial networks and siloed, centralized exchanges. Coinbase has a strong position in the latter, but it’s hard to see that as an exponentially growing market (even without accounting for the future compressed margins).

Coinbase’s DeFi opportunity

There are a couple other areas where Coinbase’s business and DeFi converge:

  • USDC - Coinbase owns 50% of Centre, which operates USDC, along with Circle. In the centralized world, USDC is far behind Tether in terms of liquidity, but there is a strong argument that it could be the stablecoin in DeFi. There may be other opportunities, particularly a tokenized BTC to compete with WBTC.

  • Institutional investors - Coinbase went to great lengths in their S1 to emphasize their institutional business. Microstrategy, Tesla and many of the large BTC purchases have been executed through them. It’s not clear that large investors are ready for DeFi, but it’s a relationship game and Coinbase hopes to convert these investors into full-fledged member of the crypto economy.

  • Custodian - the self-custody revolution has not arrived Coinbase is one of the top 3 custodians in the space, along with Anchorage and Bitgo. This is an extremely low margin business, but since many cryptoassets require voting and other on-chain actions, custodians could become an important touchpoint for DeFi related services. Coinbase is going hard in ETH2.0 staking also, which it likely hopes to upsell users on other products.

  • Coinbase Wallet - Its non-custodial wallet doesn’t get much love, but it’s a good product with traction and the Wallet Connect QR code appears to be a must integration for all DeFi apps. Theoretically, Coinbase Wallet could be exactly like (save bank transfers) except it’s enabling its users to access DeFi, instead of Coinbase.

Binance has a different playbook

The largest cryptocurrency exchange is facing similar headwinds as Coinbase, but of course they have a much more dire long-term threat in terms of regulation. Instead of doubling down on regulated activity like Coinbase, Binance is launched Binance Smart Chain, an EVM compatible chain aimed at replacing’s centralized orderbook exchange and other centralized services.

So instead of being the regulated gateway to the open DeFi ecosystem, Binance is betting on creating a semi-permissioned and semi-centralized ecosystem that interacts with other blockchains. So far it has been successful, precisely because it’s easier for it to coordinate product launches and drive users. This works in the short-term, but will decentralized chains emerge with a more robust ecosystem eventually?

Coinbase certainly hopes so. Still, Binance - seeing the growth and potential of DeFi - is actively trying to prevent its own disruption. Coinbase seems to be aware of the same forces but need to be more pro-active in carving out their space in the DeFi future.

Tweet of the Week: Sunday’s carnage explained

An absolute killer thread from Willy Woo on the mini market crash over the weekend. The FUD police are out and about but it’s hard to escape the fact that BTC, ETH and DeFi tokens are super volatile assets and the crypto space has Archegos-level of leverage, so price swings can quickly become violent. BTC and ETH have traded sideways and a up the last two months but the 10% down days don’t seem to be going away.

Chart of the Week: Dai grows and stabilizes

MakerDAO has appeared to leave its peg problems in 2020 with Dai staying close to its peg for the last five months, even as Dai’s circulating supply increases 500% to more than $3.6bn. Of course, much of this can be attributed to the Peg Stability Module, which allows market makers to always mint 1 Dai with 1 USDC. Lots more charts and info in Coin Metric’s State of the Network from last week.

Odds and Ends

  • DeFi Saver launches transaction recipe creator Link

  • Gauntlet: Aave Market Risk Assessment Link

  • Flashbots Transparency Report Link

  • Bancor unveils limit orders, using KeeperDAO and 0x Link

  • MEV resources guide Link

  • completes $1.1m buyback of YFI Link

  • New lending protocol Liquity reaches $1bn TVL in 10 days Link

Thoughts and Prognostications

That’s it! Feedback appreciated. Just hit reply. Written in Brooklyn. Trying to work on productive discourse online and with friends, family and co-workers.

Dose of DeFi is written by Chris Powers. Opinions expressed are my own. I spend most of my time contributing to DXdao*. All content is for informational purposes and is not intended as investment advice.

Did Flashbots drive gas prices lower?

BSC's success, plus Dose of DeFi in Chinese!

No deep dive today but an exciting announcement: Dose of DeFi can now be read in Chinese!

The last three editions have been translated and upcoming editions will be accessible a day or two after the original post is up. Ping Xiong (平兄) is doing the translation. Check it out and forward along to anyone interested:

Also, if you didn’t know, Dose of DeFi can also be read in Russian. Denis Suslov translates DoD every week to a Telegram Group.

Tweet of the Week: MEV and Lower gas

Like dangling food in front of starving people, Stephane posits that the relatively low gas prices may be because arb bots that normally compete in Priority Gas Auctions (PGA) and clog the network for all Ethereum users are instead directing their arb transactions directly to miners, or the 60% using Flashbots Geth. By sending the transaction directly to the miner, the arb bot does not need to set a high gas fee with hopes of getting selected in the mempool. Of course, arb bots are still paying the miners for prioritizing their transactions, but this happening off-chain, so it doesn’t raise prices for everyone else using Ethereum.

It’s way too early to tell if this is true, but it certainly seems possible that extracting the high-value transactions lowers the cost to use for all. Flashbots’ end goal is to auction off transaction priority, but there was a spicy Op-Ed in CoinDesk by Cornell Professor Ari Juels that said Flashbots’ “front-running as a service is theft”. Jules and Co. argue that more research can be done to create a fairer system for transaction ordering. This seems like just the beginning, especially as migration to Layer 2 begins. Arbitrum’s Ed Felten chimed in with his take, Five theses about transaction ordering, MEV, and front-running. Robert Miller has an excellent tweet thread on a MEV ‘sandwich tx’ that scored 300 ETH.

Paradigm’s “MEV and Me” post from February is also worth revisiting. If you’re just getting started on MEV, check out the Flashbots github, dashboard, November announcement and this helpful MEV explainer video from Phil Daian.

Chart of the Week: BSC and Pancakeswap rise

Andrew Kang leading the charge during the Great BNB, Pancakeswap and BSC Bull Run of 2021. The Binance ecosystem has continued to grow in users, TVL and volume since DoD’s Feb 22 “Binance Smart Chain begins the multi-chain DeFi era”. ETH diehards are screaming bloody decentralization, but ultimately this could play out similar to the Sushiswap saga, where the vampire attack brought in new users and drove TVL for all projects. Some say BSC apps have better UX for mainstream users BSC is onboarding tons of new users to DeFi (or Metamask), particularly in South East Asia. It’s also a potential preview of the new markets/customer segments that Layer 2 solutions unlock as they roll out later this year.

Odds and Ends

  • Ribbon launches Theta Vaults, automated covered calls in one click Link

  • dYdX launches perpetual contracts for UNI, AAVE Link

  • CryptoBriefing: BasketDAO storms the DeFi Index scene Link

  • Scaling Ethereum hackathon Link

  • Aave proposes “mint Dai with aDai” integration to Maker Link

  • Defiant Media raises $1.4m Link

  • Fei Protocol Vulnerability Postmortem Link

Thoughts and Prognostications

That’s it! Feedback appreciated. Just hit reply. Written in Brooklyn. Extremely grateful for the work that Denis has done to get Dose of DeFi 中文 up and running. More to come!

Dose of DeFi is written by Chris Powers. Opinions expressed are my own. I spend most of my time contributing to DXdao*. All content is for informational purposes and is not intended as investment advice.

Fei launch and the enduring allure of stablecoins

Plus demand vs. capital efficiency and the resurrection of YFI

The Fei Protocol launch had all of the markings of a mega launch. Part of it was the timing; the bull market is in full swing with an unending supply of new and existing capital pouring in to token launches, yield farming and project fundraising.

Some of it was the novel launch mechanism, which bootstrapped Fei, the stablecoin, and distributed Tribe, its governance token, while trying to be as “ape and whale-resistant” as possible.

But a lot of the hype and anticipation is because Fei is a next-generation stablecoin protocol, and stablecoins are by far the most important asset in crypto after Bitcoin and Ethereum.

Collateralizing Fei and distributing Tribe

The dust is still settling on the Fei launch but here’s what we know:

  • $1.3bn in ETH was contributed to the “Protocol Controlled Value” or PCV, which minted more than 2.3bn Fei. Fei is an undercollaterlized algorithmic stableoin with a pool of capital backing it, instead of over-collateralized loans in individual vaults like Maker uses to back Dai. Fei an automated central bank and the PCV is the balance sheet it uses to enact monetary policy. Fei’s bonding curve plus periodic re-weighting give it more granularity.

  • 62% of the ETH contributed also committed to a Fei <> Tribe swap. This was available to those that committed during the genesis event, but there was a massive 650 ETH “arb” as soon as Tribe launched. Like many new crypto launches, the price pumped and then fell, benefiting those with programmatic trading skills. The price is still trading down to $1.73, giving Tribe a FDV of $1.7bn - Maker is just over $2bn.

  • Fei is struggling to maintain its peg, trading at $0.92 three days after launch. The protocol is relying on direct incentives to restore the peg by penalizing all trades on Uniswap below the peg and providing rewards to those that mint Fei. This is meant to brute force Fei back to its peg, but skittish investors still keep selling Fei.

Like all algorithmic stablecoins, instilling investor confidence is the name of the game; the most efficient way to restore the peg is to get everyone to believe the peg will return. It’s still too early to see how it shakes out. Fei’s protocol design may be able to overcome its rocky start. The latest from the team says that they have “patched a vulnerability found in the incentive calculation of Fei”. Gulp. Good luck.

Three great threads related to the Fei launch

Emerging Stablecoin Landscape

The launch of Fei served as a recalibration of the stablecoin market. “Crypto Dollars” (as I tried to meme them) have been on an unstoppable growth path over the last two years and are the unsung hero of DeFi’s success and crypto’s wider adoption.

Current Blogger JP Koning categorizes the existing landscape:

This is a helpful framing. Most of the interest in purely algorithmic stablecoins (ESD or AMPL) have shifted towards semi-collaterlized models like Fei and Frax. Centralized stablecoins are by far the largest:

With Tether as the dominant player overall with 64% of the overall market share, with USDC as the closest:

Overcollateralized means the collateral in the protocol is always more than the value of outstanding stablecoins.

Dai is a DeFi OG and has significantly expanded its supply over the past year to over $3bn in circulation. sUSD has also grown but it’s not clear how much more it can scale. Terra is a similar model but it runs on its own blockchain and the elastic supply of Luna makes it somewhat algorithmic. Terra just launched Anchor, a savings protocol, with 20% deposit returns for UST.

Liquity is the latest lending protocol, launching on mainnet this week, minting a stablecoin LUSD. It aims to be hyper-efficient, offering collateralization ratios of 110%.

The holy grail is a type of fractional reserve system where the stablecoin’s circulating supply is worth more than the assets backing it.

Fei’s monster launch puts it in the same category as the largest collateralized stablecoins and even rivaling the smaller centralized coins. Of course, most is tied up now in the Uniswap pool with penalties for selling Fei below market rate. Frax is a similar algorithmic, partially collateralized design but opting for a slower growth to boostrap liquidity.

You could also put Float, RAI (Reflexer Labs) or OHM (Olympus DAO) in the last category, but don’t call them pegged coins. They also utilize Protocol Control Value to support their stable asset, but RAI and OHM aim for stability independent of the US dollar. Messari’s Ryan Watkins has a good thread on them.

Tweet of the Week: Demand over supply

Governance whisperer MonetSupply making an apt comparison between optimizing efficiency versus driving demand. In the stablecoin space, liquidity and maintaining the peg is paramount and that comes from usage, either from payments or trading. Stablecoins’ go-to market strategy is just as important as its mechanism design. Adoption begets liquidity, which begets scale. Dai’s advantage is not its capital efficiency but its 2 year head start at integrating and building liquidity. MonetSupply is throwing shade at the algo stablecoins and undoubtedly subtweeting Fei, but the genesis event was impressive at creating a huge circulating supply. Now it just needs to get that used. Terra has perhaps been the most forward at driving demand, focusing on the non-crypto market in South Korea.

Tweet of the Week: YFI TVL rises

Framework Partner (and huge YFI bag holder) Vance Spencer highlighting the growth of YFI over the last month, driven by the adoption of Yearn’s v2 vaults. YFI has been relatively quiet after a boisterous first couple months on the scene. It’s still the leading programmatic manager on-chain. It benefited enormously from the yield farming boom but it has always been an optimization engine at it’s core. Andre built Yearn for stablecoin interest rates but with more and more specialized liquidity pools in Balancer v2, Uniswap v3 and L2 pool bridges, Yearn’s strategies are likely to have plenty of opportunities to offer some aggregated alpha. YFI is up 17% over the last week to $41,691.

Odds and Ends

  • DXdao* Month in Review Link

  • Greenwood, an AMM for interest rate swaps, launches Link

  • xToken aims to offer fungible positions in Uniswap v3 liquidity Link

  • Kyber launches dynamic market maker Link

  • Dharma launches new DeFi-focused skin with gas rebates Link

  • Starkware announces Caspian, an L2-Powered AMM Link

  • imToken raises $30m in Series B Link

Thoughts and Prognostications

That’s it! Feedback appreciated. Just hit reply. Written in Brooklyn, where open streets means happy life. Problems with posting this; substack kept saying “post is invalid”. Kept deleting links until it went through.

Dose of DeFi is written by Chris Powers. Opinions expressed are my own. I spend most of my time contributing to DXdao*. All content is for informational purposes and is not intended as investment advice.

Uniswap v3 and leverage, data on Ethereum gas usage

Plus Odds and Ends & Thoughts and Prognostications

No post this week, but last week’s “DeFi: The Liquidity Revolution” can be read in a new light after Uniswap v3’s announcement.

Tweet of the Week: Uniswap v3

Uniswap v3 was announced Tuesday and it has dominated the conversation since. Dragonfly’s Hasseb Qureshi has a reaction thread, while Hayden explains why v3 is the “only possible solution” to impermanent loss and Mikko Ohtang claims v3 is the ‘end of Automatic Market Making’.

The tweet above, meanwhile, is Hayden’s response to Hasu’s tweet about whether Uniswap v3 makes leverage yield-farm platform, AlphaHomora, obsolete. Hayden’s explanation shows how ‘concentrated liquidity’ accomplishes something similar to leverage.

When v3 was released, the immediate reaction was that it would threaten Curve’s dominance of stable swaps. They will definitely compete, but the bigger question is how the DeFi market structure will shift with such a drastic change at the base liquidity layer. It’s not just AlphaHomora; most DeFi projects have done some liquidity mining campaign on Uniswap/Sushiswap, but how will those liquidity mining campaigns work with v3? And what about projects (like AlphaHomora) that have built products on this market structure?

DeFi created a new market structure, different from traditional finance, and Uniswap v3 may do the same. “Liquidity managers”, or products that dynamically adjust Uniswap price range adjustments in bulk, are likely to be a new wave of DeFi projects.

Chart of the Week: Gas after UNI airdrop

A colorful looking chart in CoinMetrics’ Ethereum Gas Report, which chronicles the surge in gas prices over the last year and how EIP 1559 will change the landscape. The chart looks at the average gas per block immediately after the UNI airdrop in September. It’s nice to see CoinMetrics expand their Ethereum coverage and lots of good info in the report, such as the clear decline in average gas per transaction over the last 3 months, as users shy away from more complex (and thus more gas intensive) transactions.

Odds and Ends:

  • Balancer teams up with Gauntlet to build dynamic fees for Balancer V2 Link

  • zkSync aims to have zkEVM, a L2 solution, launched on mainnet in August Link

  • CoinTelegraph: The ‘simposium’ eGirls storming crypto venture capital Link

  • Decrypt: Sushi faces an $880m dilemma over vested SUSHI Link

  • New lending protocol Liquity raises $6m, announces April 5 launch Link

  • Coindesk: EOS Loses Its ‘Largest’ DeFi Project to Binance Smart Chain Link

  • Bloomberg: Insurers come to crypto, promising 50% returns Link

Thoughts and Prognostications:

That’s it! Feedback appreciated. Just hit reply. Written in Brooklyn; sunshine in the evening but still a bit nippy. Looking closely for the first signs of spring in Brooklyn.

Dose of DeFi is written by Chris Powers. Opinions expressed are my own. I spend most of my time contributing to DXdao. All content is for informational purposes and is not intended as investment advice.

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