Data talks. This is the mantra I most believe in. Beyond all the pre-digested low-cost propaganda done by many crypto news outlets, one can look at very simple data points to try to understand what happened in the past and what may happen in the future.
This piece intends to explain some of what happened in the crypto market in June-August 2020, with data and analytics to back this up. It is a “Trustless Story”.
I will then open the story to what may happen next along with some data and analytics showing the first signs of this prediction. It is a “Trustless Prediction”.
It all started with DeFi projects. Billions worth of USD pumped into Decentralized Finance within few months, super charging adoption within the crypto space itself and temporarily reducing the circulating tokens for many high profile projects (its ok if you don’t get that last bit). Finally investors got to do something else than investing, they started “farming”. You would be surprised how many people within the industry itself never used metamask, nor any DApp. It’s appaling. So yeah, if there must be change, professionals and advanced crypto enthusiasts must be the change. And what could be better than telling these investors “hey here is a new way you can make money with your crypto” to get them to adopt new products?
August 30th 2020 was a historical day for crypto: for the first time, Uniswap surpassed Coinbase by volume (amount traded in the last 24h). Uniswap is a Decentralized Exchange using a revolutionary model: it allows trading without order books, Uniswap categorizes itself as automated liquidity protocol.
August 30th 2020: Uniswap surpassed Coinbase by volume
But as mentioned in my previous article on the DeFi Summer, Uniswap does not have a token and its code is Open Source. A team took this as an opportunity: it forked Uniswap code base and added a token to reward participants of the protocol even further. What’s more? it is sucking up all the liquidity from Uniswap via a vampire attack. A decent and simple critical piece about SushiSwap.
You get it: the market is going crazy and Ethereum cannot possibly cope with this infrastructural demand for much longer, changes must happen in the coming months.
FYI: for now all the DeFi products are currently running on Ethereum, according to Binance Research the current competing blockchains don’t seem to be any good at anything else but running Gambling DApps. Hopefully Polkadot and Cosmos will change this, but they still need some time to mature.
all the DeFi products are currently running on Ethereum
Another strong sign of Ethereum’s strength is USDT, the stable coin project with the biggest Market Cap with approx. $13 Billion worth of USDT in circulation as of writting, has most of its tokens on Ethereum.
Tron recently saw 23% of its USDT supply moved from Tron to Ethereum. That says a lot.
DeFi got so successful that the network got very congested and transaction fees went through the roof. Wealthy users did not care much as they would often think like this: “hey if I lock my funds worth $500,000 then I can earn about $4000 per month (10% APY) so I really don’t mind paying this outrageous transaction fee of $100 to interact with this high interest yielding DApp”.
1/ only very few DApps have wealthy users willing to pay such high fees
2/ even DeFi DApps cannot bear such transaction fees and congested network
This brings me to the next point: scalability.
Scalability can be reached in two ways:
1/ by building Layer 2 solutions for Ethereum
2/ by bridging Ethereum DApps on more performant blockchains
Layer 2 Solutions for Ethereum include:
• OMG (Plasma)
• Optimism (optimistic roll-ups)
• Matter Labs (zksynch)
When Tether announced launching on OMG Network to leverage their layer 2 solution (Plasma), the effect was near instantaneous: the price of the OMG token sky rocketed.
Other Layer 2 solutions bringing real change within the DeFi space will surely get the same attention from investors.
Bridging Ethereum DApps on more performant blockchains often means cross-chain projects. Those able to get Ethereum and Bitcoin speaking together, and those able to get Ethereum DApps to run on other protocols/network such as Ethereum DApps running on Polkadot or Cosmos.
Many founders had seen this obvious use case and attempted to solve this problem. But only a few are managing to deliver. And we are in an interesting time where some of them have finally launched or are very close to launch.
Ren is one of those projects, accessing the huge BTC liquidity by wrapping BTC coins into the ERC20 renBTC token. Note that Ren Project also took part in the more centralized WBTC project, along with the giants BitGo and Kyber.
Simply put: you wrap your BTC in WBTC and then you can use your WBTC on the Ethereum network, for instance to yield interest on a DeFi project. But hey, you are still on the oh-too-slow-and-expensive Ethereum network.
Polkadot and Cosmos on the other try to get various blockchains to talk to one another. Each project uses very different approaches though, notably their topology with Polkadot providing security built-in whereas projects running on Cosmos have to bring theirs own set of validators. Pros and cons: each project coming with its trade offs suitable for different use cases.
Each project saw its price rise tremendously in the last weeks. Considering that they are the highest cross-chain high-throughput profile projects, one can strongly suspect this rise to be related to the challenges faced by the DeFi space.
Note that Cosmos has been saying to launch its IBC module - enabling chains to inter-communicate - in the coming months.
Kusama is the wilder version of Polkadot, it is mostly the same project except it is a lot more aggressive, it evolves a lot faster and every lesson learnt along the way is used to take slower pace but better decision on Polkadot.
There are many other projects providing Layer 2 Solution and Cross-Chain Interoperability. I invite you to search for them and discover for yourself whether any correlation can be made with other ecosystems of the crypto market. You are alone now.
Wanna know more?
📚 Don’t forget to check out my other DeFi-focussed article: “DeFi Cartel Rising in 2020 Bull Market”.
🤓 Additionally, a couple of blockchain developers and I run online workshops to educate teams and execs about the latest trends of the industry. If you are interested, contact me via twitter or email (berthou dot adrien at gmail dot com).
🙏🏼 Thank you to Igor Line for sharing incredibly valuable insights, and Anthony Loewan for the amazing conversations. Without them this article would not have been possible.