| Authored by Andrey Shevchenko
You can reach me via Twitter or Telegram | | | It seems a bit weird to write about DeFi today. My news feeds are dominated by two things: U.S. elections and Ethereum 2.0 launch. | | | Of course, none of these really have any direct impact on DeFi — the former for fairly obvious reasons. | | Less obvious is Ethereum 2.0. The truth is that Phase 0 — set to go live in December — changes absolutely nothing about the existing Ethereum chain. | | I've discussed in the previous issue about the interplay between staking and DeFi. In short, staking yields are expected to be small so DeFi will likely weaken network security due to being generally more lucrative. | | | On that note, I would caution against FOMOing into staking right now. The system honestly looks underdeveloped, and in the case of Ethereum you're basically saying goodbye to your money for about 2-3 years. Staking is also not exactly a fire-and-forget thing, so overall it just seems to be a poor use of your money and time. | | Still, this is good news. Progress on Ethereum 2.0 is very much needed to scale DeFi, though in the near-term it just doesn't matter. Rollups should pick up some of the slack soon, but uncertainty remains over which solution will be more usable. | | | "Uncertainty" is just 2020 in a nutshell. Traditional markets are rallying right now despite the fact that this election will be contested, to say the least. | | | DeFi markets on the other hand are quite dead — the sell-off from October shows no signs of stopping. | | | The DeFi Pulse index continued its fall. | | | But there was still some good news for DeFi last week. | | | In traditional markets, the VIX is an indicator that shows the expected volatility of the market. | | | It's derived from the price of S&P 500 options, a contract that gives the ability, but not the obligation, to buy or sell an asset at a certain price and at a certain date. | | | The price of an option is called the premium, and it's what buyers pay to sellers for the privilege of not really losing money if they're wrong. | | | If you're wrong as a buyer, you just lose the premium — usually a fraction of your potential gain. If you're right, it's as if you bought the asset back when it was still cheap (or shorted when it was high). | | | The premium depends on a great deal of variables, but the most important is implied volatility, or how much the market expects the asset's price to move from its current position. | | | That implied volatility is very high when everyone piles into options, as they believe that the market will soon jump higher or lower. Usually the latter effect is stronger — markets go down faster than they go up. Due to this it's called the "fear index" as high values of the VIX usually imply that the market expects the underlying assets to go down. | | | Well, now there's a CVX — the Crypto Volatility Index. It's a stand-alone DeFi project that is expected to offer a tradable volatility index. | | | It's currently in beta mode but you can already visualize the index itself, which can be useful when deciding on your own trading strategy. When it's fully live you'll be able to use it as a volatility hedge, or just trade it directly. | | | Obviously the index is still just the opinion of some traders. It doesn't mean that the market has to go down as soon as the CVX goes higher. Often it's the implied volatility that responds to the market and not the other way around. | | Cross-chain DeFi gets new builders | | | The project — which was one of the original decentralized exchange builders on Ethereum — said that it will work on a seamless mechanism for connecting all the various layer one chains into one. | | | Details are scarce so far, but a team of this caliber working on interoperability is an important development for the ecosystem. | | | It also marks a bit of a change in direction for the protocol. Despite 0x seeing some success, it is clear that the order book model of exchanges just won't work on Ethereum as it is right now. | | 0x previously launched pilots based on zk-STARK sidechains, which promised much higher throughputs — vital for an order book exchange. Some of these are already live, notably DeversiFi, but it seems the project is hedging its bets with other blockchains. | | Uniswap governance gridlock continues | | | This news is not really that great, unless you're a UNI holder. | | | The second ever Uniswap governance proposal failed short of the necessary vote. It would have distributed UNI rewards to users behind proxy contracts — mostly some types of wallets and DEX aggregators. | | | This time quorum wasn't reached under any definition, so it seems that it just failed to gather the necessary support. The motivation, from what the community seems to be saying, was that this proposal did not add any value to the protocol. | | | Which is definitely true. Most of these users would've likely treated it as free money, diluting existing holders to the tune of 5,047,600 UNI — more than 2% of the circulating supply. | | | Still, this definitely sucks for the users of those wallets and aggregators. There are issues of fairness one could raise here, though at the same time nobody is really entitled to free money. | | | More importantly, it raises questions on what's the point of Uniswap governance. In other protocols, token holders decide on adding new collateral or changing important parameters. Uniswap is quite self-sufficient in that sense, and we know that the team is working on a V3 anyway. | | | It'll be interesting to see what other proposals the Uniswap community comes up with. | | | In the meantime as we see depressed moods all around, the space remains an interesting one to observe. | | | Experiments in governance, technology and finance seem rather unrefined for now, but nothing beats a bear market in its ability to sober people up and let them focus on what matters. | | | Authored by Andrey Shevchenko
You can reach me via Twitter or Telegram | | | |
