| Authored by Andrey Shevchenko
You can reach me via Twitter or Telegram | | | The DeFi space has seen it all this year. | | | Tremendous growth, exciting ideas and new projects... but also formidable tests to its resilience ranging from hacks and scams to drama and hostile takeover attempts. | | | We are now living through the Cambrian explosion of DeFi tokens, DeFi popularity, DeFi investments, DeFi this, DeFi that. And now even Cointelegraph is pitching in with a dedicated newsletter. | | | As I write this, I can't help but feel that we got here just a bit late. Of course, we reported on plenty of DeFi stories over these past few months — from in-detail coverage of MakerDAO's debt auction to being the first to report that the dForce hacker was probably going to return funds. And we've added plenty of coverage of all the yield farming "experiments." | | | Those few souls who are following me on Twitter (*hint*) will probably be aware of my growing contempt for the yield farming mania. I think the first iterations were fine, perhaps a bit overhyped due to ineffective metrics. | | | But then it continued into the food coins like Yam, Tendies, Sushi, and many low-effort forks. Those just kept grabbing headlines as everyone went in with both feet. I couldn't really understand why — sure, the irrationality and euphoria of markets knows no bounds, but even crypto veterans and influencers were piling in on unaudited and often copy-pasted projects. | | | Only after taking a closer look did I realize that it's the yield farming mechanism itself that probably created this euphoria. Food coins and forks always had at least one circular pool where farmers had to buy the token before obtaining "yield" — an eerily similar mechanism to crypto Ponzi schemes. | | | The first yield farmers would buy the token, creating initial demand. As long as new yield farming capital kept coming in, some demand for the token was ensured and it maintained its price. The problem is, of course, when the capital flow stopped. | | | Some made money with farming. Others lost it all — that's the nature of Ponzi schemes. Even without outright rug pulls like with Bitconnect or, arguably, SushiSwap, the schemes collapse at some point. | | | Not to say that there were no legitimate ideas or interest in these projects. They were often branded as some sort of fair relaunch of some other project, which captured people's imagination. We've seen, of course, that some launches are fairer than others. | | | And it's for these end-of-the-very-beginning stories that I feel we may be late. The increase of Ponzis and fraud is often just a symptom of the market reaching a local top. | | | The Dunning-Kruger curve sure looks similar to a crypto market chart. | | | Like crypto in 2017, DeFi seems to be going through its Dunning-Kruger moment — the psychological phenomenon of people vastly overestimating their initial knowledge of a subject. Ironically, it's the lack of understanding of new financial products that often results in an overabundance of Ponzi schemes or questionable investments. | | DeFi is just getting started | | | Still, boosting euphoria and maximizing yield are not the purposes of this newsletter. I guess it's my somewhat cynical world view, but I definitely don't want this newsletter to be a shill for the industry. We're going to analyze DeFi for all its good AND bad, and we won't be afraid to call out scams and dangerous ideas when we see them. | | | So we may be launching this newsletter around the peak. But DeFi is definitely here to stay, and it remains an incredibly exciting frontier of crypto. | | | The technical and legal challenges are countless, and they'll take some time to solve. The space got huge and it's virtually impossible to cover everything, but we'll do our best to highlight the things that matter — both in terms of understanding what's happening and what's about to come. | | | The dominant narrative this week was SushiSwap and its drama-laced bid to steal liquidity from Uniswap. Let's see what happened there. | | | P.S. We're journalists, not developers. DeFi is a surprisingly complex amalgam of code and economics, and that often makes it hard to fully grasp for outsiders. We rely on sources and external analysis coupled with our own understanding of the situation. The more information we have, the better, so we're always happy to hear from readers with additional insight, or suggested corrections! | | Deconstructing the SushiSwap vs. Uniswap saga from start to finish | | | Uniswap, for those who aren't aware, is one of the most popular decentralized exchanges on Ethereum today. Its volume rivals many established centralized players like Coinbase Pro, Kraken, Bittrex and others. | | | We did a full explainer on these types of exchanges, but for this story's purposes there are two main things to note: Uniswap has heavy venture capital backing, and there is no protocol token. | | | SushiSwap attempts to fix these "issues" through a community launch of a governance token that forever entitles holders and early liquidity providers to a share of the protocol's revenue. | | | The project was launched on Aug. 28 by an anonymous developer known as Chef Nomi. Hundreds of millions of dollars in yield farming capital flowed to it almost immediately. But beneath the veil of rewarding early contributors lies a fairly obvious hostile takeover attempt. | | An attempt to steal liquidity | | | The initial idea was that after two weeks of yield farming — done with Uniswap pool tokens — the contracts would automatically migrate Uniswap liquidity they attracted to SushiSwap. The platform is a direct code fork of Uniswap, so they are virtually the same. | | | Hayden Adams, the founder of Uniswap, was visibly unhappy about the whole ordeal. SushiSwap held approximately 70% of Uniswap liquidity, making it the larger protocol of the two — in theory. There are a few caveats to this, namely that Uniswap's total value locked amounted to about $287 million the day before the launch of SushiSwap, rising to $1.47 billion as of a few hours before the migration. SushiSwap's TVL was about $1.2 billion. | | | Uniswap's growing TVL is more a reflection of SushiSwap. Source: Defipulse | | | The logical conclusion is that most of SushiSwap's capital is new and did not come from Uniswap's existing liquidity providers. The calculations of total value locked leave ample room for error though, so it may be difficult to judge until the migration occurs. There is also no guarantee that the capital will stay once farming yields wither. | | | The migration process has been sped up and was started on Wednesday around 2 P.M. UTC. But in the meantime, Chef Nomi pocketed a cool $13 million in Ether converted from their significant SUSHI holdings. These funds, they reassured earlier, were meant to finance future development. | | | Chef Nomi didn't immediately quit the project entirely, but accusations of pulling an exit scam soured their reputation. A few days later, Nomi transferred control over the contracts to Sam Bankman-Fried, the CEO of FTX exchange. While he is the current steward, he is set to soon relinquish control to a community-voted list of nine multisig holders. | | | Nomi's actions may have tainted SushiSwap's "fair launch" prerogative, but the project is still on track. It was listed by several reputable exchanges and its code was audited and reviewed by multiple security firms. Despite all that, major bugs were inevitably found, but without disastrous consequences so far. | | | Whether SushiSwap can succeed despite these issues is an open question. The strength of a loyal and incentivized community should not be underestimated, but SushiSwap would just be another entry in a long list of "Uniswap killers." | | | Personally, something tells me that Uniswap is here to stay. But the story should still be an important warning to it and other projects. Code can be forked, liquidity can be stolen. Established DeFi projects will need better moats to defend themselves against such attacks in the future. | | | Authored by Andrey Shevchenko
You can reach me via Twitter or Telegram | | | |
