Bitcoin and Tether on DeFi

The two most important assets to DeFi's growth in 2020


Welcome! I’ve switched over the newsletter to substack for better online consumption. You can find past issues below. Check out “How the DSR Will Affect DeFi Lending” and “SNX vs KNC” if you’re looking for a taste of what Dose of DeFi is about.

It seems like every end of year post labeled 2019 as the “Year of DeFi” and it doesn’t look like that sentiment will change in 2020. You will find no counterargument here, but hopefully a little more color. Thanks for reading, and as always, feedback appreciated.


Finance can be simplified down to two activities: trading and lending. Insurance, options and derivative products are all some combination of lending or trading an asset. DeFi is no different; except at the moment, lending and trading are the only products (though more sophisticated ones are on the way).

DeFi saw strong growth in 2019, but if you look at the broader crypto trading and lending landscape, two assets dominate: Bitcoin and Tether.

Tether – with $4.6bn in circulation – remains one of the few tokens and crypto projects that have found product-market-fit. The product is an unregulated, dollar-denominated stablecoin and the market is Asian exchanges and traders. The fit is an easier payment system than relying on local currencies and banking systems with regulated capital flows (particularly in China).

Traders enjoy this flexibility to withdraw and deposit assets across different exchanges. Centralized exchanges use Tether themselves for internal and external operations, so its no wonder why Tether has yet to see a DeFi moment.

But with steady growth from Bitfinex’s decentralized exchange DiversiFi, it’s easy to see how Asian exchanges could try and replicate Coinbase, who continues to be a torchbearer for DeFi education and growth.

Tether’s stunted DeFi growth might also be attributed to the retail trading culture in Asia. As the trading side of DeFi matures – Uniswap, Kyber, 0x and Synthetix – arguably had a better second half of 2019 than any of the lending platforms – Tether and Asian markets may catch the DeFi bug.

Asia is a tough market. But Bitcoiners might be tougher. Bitcoin is the most traded crypto asset and also the largest source of collateral for lending, but Bitcoiners are….how to say…skeptical of other projects and any whiff of centralization. As some have said, there is basically an X-prize for anyone that can create trustless BTC on Ethereum.

WBTC, a Kyber-affiliated initative, is basically like USDC, but Bitcoin instead of a dollar. A bitcoin is locked up by a semi-centralized entity, who mints a corresponding ERC-20 token that’s freely transferrable on the Ethereum network. There is currently 596 bitcoins locked up. China-based wallet imToken has a similar version and already has 295 of imBTC in circulation (these two combined have more Bitcoin locked up than the Lightning network).

Further along on the trustless spectrum is tBTC, a collaboration between cross-chain fanatic James Prestwich and the Keep team. It relies on Bitcoin multi-sig and a Maker DAO-like system to lock up Bitcoin and then mint tBTC as a corresponding ERC-20 token.

Like MakerDAO, it uses economic incentives and oracles that monitor both price feeds instead of relying a central custodian to hold Bitcoin. Also like MakerDAO, however, its collateralization requirements mean that it takes 1.5 BTC to mint 1 tBTC.

Atomic swaps and other infrastructure-level cross-chain solutions offer more versatility. Cosmos and Polkadot could find product-market-fit by bridging assets to Ethereum-based DeFi protocols.

One of the most interesting projects in the race for a trustless BTC is the Ren Protocol. It aims to create a dark pool to transact BTC, ETH and ERC-20 tokens privately. The order-matching engine runs on a series of nodes running the Ren virtual machine (RenVM) that utilize zero-knowledge proofs to transact and communicate privately. Ren’s ChaosDEX is currently in public beta mode and allows for ETH to BTC trades without any centralized third party.

Perhaps the biggest darkhorse is Coinbase. It already custodies tons of bitcoins and have the second largest stablecoin (USDC). Anyone who trades bitcoins on Coinbase would surely trust it to issue an ERC-20 version of Bitcoin.

And the prize is no small potato. Just this past week, many applauded as there is now 3% of all ETH locked in DeFi. It would take just 0.3% of Bitcoin to achieve the same end.

Market Chatter (a new section due to reader feedback. Love it? Hate it? Let it be known)

·      ETH’s token mechanics come into question. Bitcoin finished 2019 up 86%, while ETH declined by 6% and the gap has only gotten worse in the first 10 days of 2020. Ethereum competitor, Tezos, meanwhile, surged 280% in 2019. This despite all of the developer activity in DeFi and Ethereum. From Ethereum core devs to traders, many recognize that ETH cannot “meme its way” to relevancy and the value of Ether is crucial to the success of Ethereum (duh). The move to proof-of-stake will help, but there is increasing support for EIP-1559, which introduces a fee market for transactions.

·      Bitcoin as a hedge against global volatility gains steam. What’s crazy about the wild price swings in BTC over the past 10 days is how easily explainable they are: many thought the US was headed for war, so the price of Bitcoin went up, and when the conflict appears to have deescalated, the price retreated. While it may be existing Bitcoin hodlers that are responding to these market events, if Bitcoin’s price movements continue to mirror global macro narratives, other investors may add it to their portfolio as a hedging and diversification tool.

·      SNX takes a plunge. Synthetix may have had the best 2019 of any crypto project, but after climbing 4066% in 2019, the first 10 days of 2020 were not kind, with the token sliding 31%. The project’s novel token economics helped fuel the price rise; many new SNX holders would immediately stake their tokens to lever up and buy more SNX. This is great on the way up, but can spiral out of control on the way down. Synthetix does not have a liquidation mechanism like MakerDAO, but requires a 750% collateral ratio to claim trading profits and SNX inflation rewards. Its token economics are surely facing their first real test. @DegenSpartan has more.

Chart of the Week: DEX market share

0x CEO Will Warren dives into 0x’s 2019 and put together a number of industry wide stats. Uniswap, Kyber and 0x-based relayers all have made strides in the second half of 2019. Success in 2020 will hinge on layer 2 scaling solutions and attracting larger liquidity providers.

Odds and Ends

·      MakerDAO Founder Rune Christensen Talks Company’s Move Into Asia, China

·      Kraken lists USDC

·      Meet Zero Collateral – Undercollateralized DeFi loans on Ethereum

·      Most significant exchange hacks of 2019 [there were 12]

·      The Aave Oracle Network Powered by Chainlink is Now Live

Thoughts and Prognostications

·      What can we learn from the a16z investmentinto Synthetix? [mjaycee]

·      3 DeFi DApps starting 2020 off strong [DeFi Pulse]

·      What is DeFi - An Introduction and Why DeFi Matters [Danger Zhang]

·      Credible Neutrality as a Guiding Principle [Vitalik]

·      Investigating the Failed Stellar Inflation Experiment [Coin Metrics]

·      Memecoins, Audience and Telegram [Messari/Two Bit Idiot]

·      A crypto banking reality check [Nic Carter]

That’s it! Feedback welcome. Written in Bali and sent (with some technical delays from Shanghai)