Prediction Markets, ETH2 and DeFi

Plus will Circle's high yield business accounts bring more users to DeFi?

A busy week of news in crypto and the broader world with the U.S. presidential election and the ETH2 staking contract launch. DeFi does not exist in a vacuum. Increasingly, DeFi flows, products and services will be affected by macro trends and niche, real-world use cases.

Without opining on whether or not prediction markets are “DeFi”, I wanted to look at how DeFi infiltrates tangential markets (or vice versa). Specifically:

  • Prediction markets

  • ETH2 Staking

  • Circle’s USDC high yield digital dollar accounts

Prediction Markets’ first foray in Presidential politics

Prediction markets have long been touted as possibility that Ethereum unlocks. This year, Polymarket, Omen* and Catnip (built on Augur v2) all had a coming out party of sorts, while centralized solutions like Predictitt, Betfair and FTX gained in popularity and Twitter citations over the last week (FTX reportedly raked in $1m in fees from election betting).

There is still a bit of debate about how prediction markets fared. Prior to the election, they favored a Biden win, but not at the levels that political forecast models projected. Still, it was during the wee hours of election night and the morning after that markets saw the most activity:

Presidential odds market, 24hrs from 9am EST on 11/4 via Omen.eth

As low Biden vote totals in Miami-Dade County foreshadowed an early Trump victory in Florida, investors poured into Trump positions across all prediction markets, but then as WI, MI and PA numbers showed Biden was still in a strong position despite FL, traders quickly swooped up Biden shares at low odds.

Prediction market supporters would say they previewed a tighter race than modelers and arguably the polling error itself. The gyrations of the night reflected the prevailing sentiment at the time that Trump was set to pull off another upset, but corrected as the picture became clearer.

Critics would say that the initial odds undervalued the robustness of Biden’s polling lead, even WITH a huge polling miss, Biden was still a comfortable favorite. Furthermore, the “apeing” and “Yoloing” into Trump highlights the dumb money in these markets, and that most political experts, who did not just look at headline data, still forecasted a Biden win throughout the night.

Next comes the resolution process, which remains challenging with many Trump “Yes” owners joining the President in not yet conceding the results of the election. FTX is issuing a new TrumpFEB2020 token that pays out if in fact, Trump is President of the U.S. in February 2020. Polymarket announced resolution details today, while the Omen market does not close until December 20 and the Augur market powering Catnip resolves on January 22.

Two takeaways:

  • Prediction markets have arrived and will be cited more and more in mainstream coverage. The interest in prediction markets is a secular trend, independent of anything going on in the blockchain space. Just as data-driven journalism has become more prevalent, prediction markets will become a convenient statistic for journalists to cite. It doesn’t matter if it is signal or noise; it’s a data point for Twitter to comment on.

  • Auxiliary DeFi Services - DeFi products and services are mostly built for margin traders, but if prediction markets succeed, there could be many “back office” products and services that create a more seamless experience for prediction market users. Oracle services, obviously, are crucial, and there seems to be some additional work done on the collateral and withdrawal process. It’s a long time to lock up capital, so better management of the collateral and attracting large liquidity providers to help stabilize markets as winners look to exit before the market has closed.

*Note: I own DXD and am a REP holder of DXdao, which governs Omen.

ETH2 staking contract launched

Ethereum researcher Danny Ryan announced the release of ETH2’s v1.0 spec, which included the mainnet address for staked ETH to be sent to serve as a validator for the upcoming ETH2.0 launch. Ethereum 2.0 is a huge topic and I’d recommend people who have thought more about this:

As ETH2.0 moves out of the technical development phase, we’ll finally see how quickly the financialization of staked ETH happens. The initial crop of depositors may be die-hard Ethereans, but someone will create a derivative for staked ETH.

The question is - can DeFi be the primary market for trading staked ETH? With all other markets, even ETH trading, DeFi is trying to play catchup to an established market, but DeFi has infrastructure that could build a competitive product. Check out this Dune board to track ETH2 deposits.

Circle announces 8.5% on digital dollar business accounts

Circle, which co-owns USDC and Centre with Coinbase, is now accepting applicants to its “digital dollar business accounts”, which offers high yields to USDC depositors.

This initiative is not targeting DeFi projects or even crypto companies. Centre thinks businesses can run their entire company on USDC, in lieu of a traditional bank account. This may have a particular appeal to companies outside the U.S.

However, this is not a bank account. Circle is generating the yield by lending the USDC to Genesis, not too different than what BlockFi and Gemini have been doing the last year on GUSD deposits.

Still, there isn’t a bigger DeFi trojan horse than USDC. Circle is trying to create an experience where the “blockchain is in the background” for businesses, but that will only create a larger market for assets on-chain, which will inevitably be put to use in the most efficient DeFi protocols. Businesses onboarding USDC increases the addressable market for DeFi products and services.

Tweet of the Week: New Yearn vaults

This snapshot proposal on a new fee structure just passed with overwhelming support, although the 19.5% of the performance fee goes to Yearn Governance and 0.5% to the strategist. Of course, the new fee structure looks very familiar as the 2 and 20 model is common in VC and hedge fund worlds (perhaps not as much anymore). Yearn’s v2 vaults should be another step forward in the DeFi money managers game. There was a good Yearn strategic overview post in the forums. $YFI also had a good week, on the backs of a poorly executed short.

Odds and Ends

  • UMA launches ‘Developer Mining’ scheme to encourage synth development Link

  • DEX aggregator 1inch launches v2 and updated interface Link

  • Oracle platform Razor Network raises $3.7m NGC Ventures, Alameda + Link

  • Grayscale Ethereum Trust passes over $1bn in AUM Link

  • Offchain Labs launches Uniswap fork on Layer 2 test net Link

  • DeFi Pulse Index Collateral Onboarding Application MIP6 Link

Thoughts and Prognostications

That’s it! Feedback appreciated. Just hit reply. Written in Brooklyn. Less thinking and prognosticating last week with the election. Unseasonably warm and undeniably beautiful weather in Brooklyn the last few days.

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.