To Bitcoin (BTC) proponents, the world’s need for a decentralized form of money is more apparent than ever, as challenges mount to government monopolies on money-printing and military force, from the U.S. to Uganda.
It’s possible that this vision is attracting new investors into crypto, but this week’s price surge (notwithstanding the sudden bitcoin price whiplash at midnight Eastern, today) may also be driven by circular enthusiasm among existing crypto traders. That seems to be what’s happening with ether (ETH). The No. 2 crypto asset outperformed bitcoin on the week (23.7% to bitcoin’s 18.7% Friday-to-Friday close provided by Coin Metrics). It wasn’t likely due to excitement over a decentralized alternative to the tech giants who testified virtually in Washington. Ethereum’s buzz is coming from decentralized finance (DeFi).
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This week, total value locked (TVL) in DeFi climbed toward $4 billion, driven upward as holders of ether and other crypto assets sought liquidity rewards, paid for by holders of native tokens issued by DeFi lending networks. YFI, a novel token issued by Yearn.Finance, an aggregator of DeFi deposits (as explained here), was a standout. It took DeFi’s blue-chip stablecoin, DAI, on a dizzying ride to new heights of issuance and back again.
This example of circular enthusiasm is not alone: Compound Labs‘ COMP token and the inflationary token AMPL both use similar mechanisms. The enthusiasm for these lending-related DeFi networks was not dampened by Tuesday’s news that OnDeck (ONDK) would sell to another fintech lender for $90 million. OnDeck went public in 2014 at a valuation of $1.3 billion.
I still don’t know what the DeFi platforms could be doing right that so many lending fintechs have done wrong.
Ethereum’s core value proposition, meanwhile, is taking on a shade of irony. DeFi is interesting, but Ethereum transactions and fees – metrics you might call ether’s fundamentals – are pushed skyward right now by tether (USDT), a stablecoin with a centrally maintained dollar peg. It crossed $11 billion in issuance on Wednesday.
DeFi’s recent performance is indeed impressive, but so far it’s been outstripped by centralized projects.
Tether demand is also prodded upward by a circular trade. As derivatives data shop Skew pointed out, basis, or the difference between cash price and futures price, on one of the world’s most liquid bitcoin futures markets hit 20% this week. With tether…