I was expecting to spend a large portion of this edition of Finance Redefined analyzing Aave’s liquidity mining program. There was some anxiety from investors that the emission of 2,200 $AAVE per day (which would translate to roughly 5% of the ecosystem reserve fund of 2.8 million AAVE per year) might end up dragging down the token’s price as farmers earn and dump.
I would feel very uncomfortable holding an asset if the governance token of a very important protocol ends up in the hands of people who only think about short term gains.
— Grogu (@eip1559) April 26, 2021
Turns out, it’s unnecessary: the program’s an unmitigated success. The AAVE token is up nearly 15% since the launch of liquidity mining to $462, and the protocol’s total value locked figure has surged to $11.8 billion — up from just over $7 billion since liquidity mining began.
Well-researched liquidity mining works. Only question now is, if the program is discontinued, how much of that TVL will be sticky?
Other narratives to keep an eye on:
Money legos keep stacking
At the start of the year there was speculation that in 2021 DeFi would see something of a novelty: one protocol acquiring another, likely via a governance token buyout. The Synthetix 2021 roadmap in particular opened the door to such a possibility, comparing it to acquisitions in TradFi and looking to Yearn’s merger/acquisition/collaboration spree for inspiration.
Large-scale mergers and acquisitions have yet to play out, however. There are some smaller examples brewing — Inverse Finance is currently looking to buy out Tonic for some $1.6 million, for instance — but instead what we’re seeing is a boom in deep integrations at the protocol and frontend layers.
Ladies and gentlemen
We finally present to you the first on-chain DAO acquisition vote in the history of crypto
On Monday, Badger DAO and RenVM launched the Badger Bridge, a new interface for depositing native BTC into Badger vaults with just a few clicks. The integration stands out for two reasons. One is that it’s so clearly beneficial for both parties: an idiot-proof way to earn yield on BTC is attractive for hodlers, meaning Ren will see an uptick in activity on its bridge (and therefore protocol fees), while Badger likewise gets a boost in TVL.
The other angle, however, is the willingness with which Ren subordinated its branding, letting Badger — which, I’d argue, has the stronger community — take over the landing page. Were it not for absurd token valuations, one might have been an acquisition target for the other, given the obvious needs each fills — but by working together Ren gets everything they’d want from a protocol like Badger, and the same applies to Badger and Ren.
This raises the question: why bother with takeovers when a friendly integration can accomplish the same effects?
Another prime example is today’s Balancer-Gnosis Protocol announcement. You can see the details in my piece, but effectively Balancer v2 is bringing some neat innovations to AMM liquidity provision and Gnosis’ CowSwap is a liquidity aggregator and offchain transaction batching protocol that will reportedly cut back on miner extractable value. The combination of the two will make for a significantly more feature-rich DEX from both a LP and trader’s perspective — possibly even positioning the Balancer-Gnosis-Protocol as a Uniswap v3 competitor.
In a statement to Cointelegraph, Balancer CEO Fernando Martinelli noted that such a deep collaboration would be impossible in the traditional finance world:
“Each of the two protocols would be impossible to implement in the traditional finance world simply because there is no such thing as trustlessness there (you always need an intermediary). Even if that were possible, combining these two protocols would be as much of a challenge as it would be to integrate Fidelity Index Funds (Balancer) with Nasdaq (Gnosis) under one single platform.”
Acquisitions may be an outdated model. Interoperability and composability means that protocols can benefit from one another without hostile takeovers.
The branding might still need to get figured out, however — Balancer-Gnosis-Protocol isn’t exactly the best name.
Are you speaking my language?
The goalposts keep moving for Ethereum maximalists as organic activity begins to spread to other chains.
On Solana, for instance, $COPE and $STEP have attracted significant community following and investment from major players (including from funds other than noted SOL supporters Alameda Research!), and this morning announced a hackathon aiming to kick off the hashtag “solanaszn.” Other folks have bandied around “Solana Summer” in the mould of last year’s DeFi Summer, but whatever your preferred sobriquet the competition is for real.
The success has — perhaps predictably — led some observers to try and poke holes in SOL’s growth thesis. While, like any chain, there’s plenty of attack surface, one growing criticism is that Solana’s flagship language, Rust, is both difficult and exotic.
1/ in my humble and naïve opinion, Rust might be an initial bottleneck for Solana dev adoption as its only slightly easier than learning C++ and will take time to have people to pick it up
— 10spot (@10spot1) April 24, 2021
In a statement to Cointelegraph, Solana founder and current Solana Foundation president Anatoly Yakovenko rejected that view.
“Rust is a modern language with wide adoption suitable for writing high performance secure code. It has ranked on Stack Overflow as one of the most loved programming language by 65,000 people who code, so we are confident this plays a key role in driving the organic growth in our developer community to date,” he said.
He also noted that the Foundation has counted 2,000 developers building on Solana (he didn’t mention methodology or definitions used to arrive at the figure, and it seems perhaps a touch inflated given that a 2019 study from ConsenSys found that there’s about 1,300 Ethereum developers, and in 2020 Electric Capital pegged the total number of ETH devs around 2,300), and that Solana devs aren’t interested in “copy/pastes” of Ethereum projects.
He’s also right about the Stack Overflow study, though a 2018 survey from the Rust Blog showed that over 20% of developers working with the language felt unproductive after a year of use.
Whatever you feel about Rust, however, it’s likely a problem that money can fix. And to that end Solana is pressing the pedal: the hackathon will feature “up to $1 million” in prizes and/or seed funding. I think I could learn a tough language for that.
Other stories this week:
Uranium Finance loses $50 million, likely rug
ETH cracks all-time highs
Aave’s liquidity mining program a success out of the gate
Some major venture capital names are ‘sett’ to join the Badger DAO community.
Bitcoin on Ethereum-focused decentralized finance (DeFi) protocol Badger DAO announced today a $21 million sale of DAO treasury assets to four major investors: Polychain Capital, Parafi Capital, Blockchain Capital, and noted whale wallet 0xB1.
The sale was made as part of a wider “Treasury Diversification through Strategic Partnerships” plan first outlined in Badger Improvement Proposal (BIP) 37. The Badger treasury, currently worth over $600 million USD, is primarily allocated in $BADGER, the DAO’s native governance token, and $DIGG, a synthetic rebasing Bitcoin.
According to Badger DAO founder Chris Spadafora, the sale featured an exchange of staked bBADGER tokens for USDC stablecoins which will be used to create a “Badger Backstop” insurance pool. By diversifying a percentage of the treasury to assets like stablecoins, the DAO also hopes to prepare for market downturns with a “barbell” portfolio allocation.
Spadafora said in a written interview with Cointelegraph that it will now be up to the community to decide whether to invest the newly-raised USDC tokens into a yield-bearing protocol or to simply store them in the treasury. The terms of the sale were not disclosed, though the announcement adds that the new partners will be “getting involved in governance to help the protocol grow, providing long term liquidity and building more bridges with institutional ecosystem partners.”
The sale is among the earliest examples of venture capital entities investing in a DeFi by way of a DAO — and it’s possibly the largest to date. In 2018 Adreessen Horowitz invested $15 million in MakerDAO, and earlier in the month Synthetix raised $12 million from a group of VCs as well.
Such relationships have been the target of ire among some DAO community members given that VCs often receive preferential investment terms. DeFi founders have largely been in unison that VC entities bring unique value to projects, however — a view that Spadafora has also adopted.
“DAOs should embrace large investment players based on their willingness to participate in governance and open their network to push the protocol forward. Doing it right for VC’s is about becoming a community member vs an investor.”
A band of cunning Redditors successfully crushed Wall Street short bettors and made global headlines all week.
Bitcoin and Ethereum had a tumultuous week, especially after Elon Musk subtly endorsed the leading cryptocurrency.
This week’s crypto to-do list offers readers a new way to bring BTC to Ethereum.
The DeFi news category was brought to you by Ampleforth, our preferred DeFi partner
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This week’s edition ofwNewsunpacks how Redditors managed to bankrupt a hedge fund and inflict serious losses to others.
The mechanics of a Robinhood-fueled short squeeze has made headlines globally. And while many crypto enthusiasts are calling for a paradigm shift, finance may just be experiencing the growing pains of Internet-scale communities. Only time will tell.
Bitcoin and Ethereum traded sideways for most of the week, at least until the world’s richest man decided to endorse BTC on Friday.
Finally, weekend hobbyists can learn the ropes of one of the most interesting projects in crypto. Badger DAO is bringing Bitcoin to Ethereum, with a twist.
All that and more, below.
Occupy Wall Street 2.0
So, let’s talk about what seems to be the only story in finance these days: The WallStreetBets revolution.
It has all the makings of a great story. There are elements of David and Goliath, Robinhood, populist revolution, and sheer mass boredom. Indeed, the narrative is eternal; this edition is just steeped in financial jargon.
This week’s column will create a timeline of events, unpack the two dominant narratives, and, most importantly, reveal how the crypto industry will likely benefit.
But, first, a quick explainer on the mechanics behind theGameStop (GME) short squeeze.
The Big Short (Squeeze)
In laymen’s terms, shorting a stock means you borrow an asset with the expectation that the asset will drop in value. Then you sell that borrowed asset on the open market, repurchase it with your profits once the asset drops, then return the loaned asset and keep the difference.
Here’s a quick theoretical example.
Stock A is trading at $10, but Kaye thinks it’s going to crash soon. So, she borrows the stock from a brokerage and quickly sells it for $10. Don’t forget, Kaye still needs to return the borrowed stock to the broker eventually.
The price then drops to $5 because Kaye is an excellent market guru. She then quickly repurchases the stock at that price using the $10 she made from her earlier sell, returns the stock to the broker, and keeps the extra $5.
Remember, she borrowed the stock, not the value of the stock at that time.
As a side note, when an investor asks their broker to short a stock, the broker isessentially just asking another investorwho holds the stock to lend it out. Sometimes this arrangement is buried in the fine print, however.
Now, let’s unpack what happens when the stock doesn’t do what it’s expected.
Kaye has just sold the stock for $10, expecting it to plummet eventually. Instead, though, the stock rises to $12, and she still needs to repay that stock loan. She has two choices: She can either repurchase the stock and take the $2 loss and return the loan, or she can wait and see if the stock eventually falls to a point where she makes a profit.
The latter option is perilous because there is no limit to how high a stock can rise. This means that Kaye’s losses could also be unlimited.
Here’s how this is related to GameStop.
Back in September 2019, a character named r/DeepF*ckingValue (name adjusted for press) beganpostingabout GME on Reddit and his prayer bets on the stock. At that time, the company was also doing quite well, but the stock was underperforming relative to its health.
Josh Gross has anexcellent threadon this undiscovered backstory.
Gross began digging into these posts and soon discovered an “insane” level of short interest (i.e., hedge funds like Kaye from above) banking on the fall of GameStop. These funds were, in fact, borrowing more shares than were actively being traded.
They did this because they were convinced that GameStop’s bankruptcy was inevitable, so they went all-in with max leverage.
r/DeepF*ckingValue doesn’t start looking like a genius until Michael Burry, the key figure from the 2008 financial crisis,joinedthem and began buying boatloads of GME.
The price then slowly began to rise as people joined the trade. “And then more people,” wrote Gross.
The short bettors saw this and quickly bought more shares to cover their positions. This, in turn, puts even more buying pressure on GME, lifting the price even higher. Funds thus need to buy more cover. Thus pushing prices higher. And so on.
Soon, this reached a pitch once a subreddit of millions of users,r/wallstreetbets, caught on to the game. Then Elon Musk and Chamath Palihapitiya joined in, adding fuel to the flames.
— Elon Musk (@elonmusk) January 26, 2021
This is a short squeeze, albeit of epic proportions.
Soon, Melvin Capital, the largest short bettor on GameStop, crumbled. They evenearneda $2.75 billion bailout to help close their positions.
And Then There Were Two
Two narratives have since emerged from this debacle.
The first is the story of the little guy against the big bad Wall Streeters. The average joe versus the establishment and so on. This narrative is currently capturing hearts and minds around the world. Some compare the events to a renewed Occupy Wall Street, others to the Capitol riots at the beginning of the month.
“I think that the narrative is romantic, and will likely stick as a kind of justice, a Robinhood type of arrangement,”Thomas Kuhn, an analyst at Quantum Economics, told Crypto Briefing.
Assuming that the GameStop short squeeze is a revolution, it also assumes that an ideology drove the events. And though there have been samples of ideology, one must realize that personal greed, stimulus checks, and the sheer boredom of lockdown are far more logical conclusions.
Jamie Powell of The Financial Timeswrote:
“So what is going on? The simple answer is: people have found a way to get rich quick, and are doing so. Nothing more, nothing less.”
What’s more, these Redditors likely didn’t operate alone. Surely, various funds and trading desks saw the same trade and joined en masse. Kuhn added that:
“The reality is probably more complex, where, for example, on Robinhood, the free trading app has been selling its order flow to Citadel, where perhaps High-Frequency Trading also participated in this.”
It’s difficult to call these events a clear-cut paradigm shift.
Instead, a more accurate description would be that greed, when scaled to the size of the Internet, looks an awful lot like ideology.
When so many micro forces are performing a singular, cohesive task, onlookers will have difficulty seeing each component. Thus, what was probably just a bunch of millennials trying to make a quick buck on a trading app, now looks like the French Revolution.
However, that doesn’t mean that these same millennials aren’t perfectly primed for a coup of sorts. Just so long as they get rich along the way.
1-year chart of Bitcoin vs. Gamestop percentage gains pic.twitter.com/OIx5VkUpF6
— Joe Weisenthal (@TheStalwart) January 25, 2021
Market Action: Bitcoin (BTC)
Bitcoin’s price has maintained a horizontal range for the past couple of weeks. Before the next big move, the consolidation phase has primarily held within the range of $33,900 and $30,700.
Bulls attempted a breakout above the range on Monday; however, they failed at highs of $34,900.
The bears also had a go on Wednesday, causing a strong pullback below $30,000.Fear in the marketrose to levels not seen in this bull market.
Supported byRay Dalio’s commentfrom last night and Elon Musk’sstatus updateon Twitter, which now only says “Bitcoin,” the price of the cryptocurrency shot up 15% to highs of $38,077.
Bitcoin’s Spent Output Profit Ratio (SOPR) is a robust on-chain indicator for gauging long-to-medium term market sentiments. The SOPR shot up significantly last week to levels not seen since the 2017 top.
The metric, nevertheless,touched the pivot valueof 1 after Wednesday’s correction. In an uptrend, the market rejects values below 1 and vice-versa.
The ratio has started to pick-up again, suggesting strong hands.
Bitcoin’s peak price of $42,000 is the most critical resistance, beyond the all-time high market’s bullish expectations will rise considerably.
SIMETRI’slead Bitcoin analyst,Nathan Batchelor, confirmed the same:
“If BTC reaches $42,000 then a massive inverted head and shoulders pattern will form, which points to $55,000. Additionally, bears failed to closed the daily candle under a large broadening ascending wedge earlier this week, signaling bulls appetite to test higher. Again, this pattern points to $55,000 as an upcoming target.”
Market Action: Ethereum (ETH)
Ethereum’s native token ETH logged a newall-time highof $1,477 on Monday. The surge blindsided the market’s focus towards ETH. However, buyers failed to push it higher.
ETH has since followed Bitcoin’s price action, plunging 9.29% on Wednesday and increasing by 4.8% this morning.
The daily ETH chart is textbook bullish, forming an ascending triangle pattern with higher lows and horizontal resistance. ETH seems to have a clear pass above $1,390 and a high probability of bullish confirmation above the peak value of $1,480.
The support levels for Ethereum are at $1,200 and $1,040.
Still, the funding rates for the top two cryptocurrencies on derivatives exchanges are surging, which is a negative signal.
A funding rate of 0.1% every eight hours on derivatives exchange amounts to more than 100% annual percentage rate (APR). Such high rates make shorting a lucrative option.
The last updated funding rate on Binance, for example, is 0.2% for BTC and 0.19% for ETH.
While traders and investors are getting comfortable with the new hyperactive regime, risk management and avoiding over-leveraging has become more important than ever.
Crypto To-Do List: Bring Bitcoin to DeFi
Decentralized Autonomous Organizations (DAOs) have been a major talking point in the crypto space since 2016, with varying degrees of success.
To date, DAOs have typically run on the Ethereum blockchain. The earliest and best-known DAO was launched in April 2016, less than a year into Ethereum’s lifetime. A vulnerability in the code enabled some users to steal the DAO’s funds, however, and a controversial decision was reached to hard fork Ethereum. It’s what led to the creation of Ethereum Classic.
Though the idea of launching a DAO during Ethereum’s infancy was arguably short-sighted, the blockchain has seen significant development since then. The driving narrative is undoubtedly DeFi, with almost $28 billion locked in protocols such as Aave and Uniswap.
NFTs are also booming. But less attention is paid to DAOs, despite their huge promise.
One of the most promising DAOs on Ethereum isBadgerDAO. Its aim is to usher in Bitcoin as collateral across other blockchains.
Ownership of BadgerDAO is shared, and there are several ways to participate in the project.
BadgerDAO’s products are focused on Bitcoin. One of them is called Sett, a DeFi aggregator that takes inspiration from Andre Cronje’s veneratedYearn.Financevaults.
Sett offers DeFi users strategies for optimizing yield on tokenized Bitcoin. It currently uses the following strategies:
Curve_sbtc_lp tokens: Compounding strategy
Curve_renbtc_lp tokens: Compounding strategy
Curve_tbtc_lp tokens: Compounding strategy
Badger <> wBTC Uniswap LP: Compounding Strategy
Badger: Stake Badger and earn Badger
Sett can be used to earn BADGER, BadgerDAO’s native token. Besides a 10% supply for the founders, which will be released on a slow emission schedule, BADGER has been allocated for the community only. This encompassesliquidity mining, developer mining, the DAO treasury, Gitcoin owners, and the token airdrop.
Rewards are paid based on how long users stake the funds for. Similar to Bitcoin, the supply is hard-capped at 21 million. The funds will be used to govern the DAO.
BadgerDAO’s second product is called DIGG, a synthetic Bitcoin that runs on Ethereum with an elastic supply.
The supply adjusts across all holders according to the value of DIGG relative to BTC. Users’ wallet balance increases when DIGG increases in price and decreases when the price of the token does.
BadgerDAO says DIGG is intended to create a non-custodial version of BTC that relies on elastic parameters.
DIGG has a supply of 6,250. It was recently airdropped to users who bootstrapped the DAO.
Though it’s early days for BadgerDAO, it’s an interesting project that’s helping the growth of Bitcoin on Ethereum. There’s already over $1 billion locked inside the DAO. As demand for collateralized Bitcoin grows, this could well increase in the future.
For anyone familiar with popular tokenized Bitcoin options like WBTC and RENBTC, joining the BadgerDAO could be a nice opportunity to earn yield while joining one of the first functional iterations of a DAO on Ethereum.
However, it goes without saying that many of these protocols are nascent and could fall to bugs or hacks at any time. Proceed with caution at all times.
That’s all for this week’s edition ofwNews, readers. Stay tuned for next week’s dispatch.
The DeFi news category was brought to you by Ampleforth, our preferred DeFi partner
This news was brought to you by ANKR, our preferred DeFi Partner.
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