Over the past year, several major cryptocurrency companies have suffered, and the banking industry is also in crisis. Our experts tell us what problems the DeFi sector is solving

Cryptocurrencies returned to growth in 2023. Since the beginning of January, Bitcoin’s price soared 70% and hit a local high above $28,000. The largest altcoins in terms of capitalization also rose in price following Bitcoin. At the same time, the banking system is suffering: it all began with the bankruptcy of three banks in the United States (Sillicon Valley Bank (SVB), Silvergate and Signature Bank). And then the problems of Swiss Credit Suisse, which was saved by the takeover of UBS. However, the situation continues to be uncertain. And more and more investors are looking toward DeFi.

For cryptocurrencies now also plays the fact that the U.S. authorities are trying to reduce tensions in the banking sector. And to take additional measures. And, as we remember from recent history, low Fed rates and “dovish” policy of the U.S. authorities. Then it’s a path for risky assets to hit record highs. It was during quantitative easing (QE) that Bitcoin quotes were at a peak of $69,000. And after the change in QE, the crypto market began to correct.

It is important to understand the high dependence of digital currency quotes on U.S. policy. This is a serious factor, but not a determining one. Last year, several major cryptocurrency companies, including trading venues and hedge funds, went bankrupt. The most famous example is the FTX exchange, as well as the Terra project. The total losses amounted to billions of dollars.

The main problem of both the banking sector and the largest bankrupt crypto-projects is centralization. In order to solve it, financial services in the form of services and applications – decentralized finance (DeFi) – were created on blockchain. They are an alternative to the banking sector, which is particularly vulnerable in recent times. And a replacement for the traditional technologies of the financial system.

Important benefits of decentralized finance

A key advantage of DeFi is the ability to function without the need for a third party. A computer program executes agreements between two or more parties. As a result, under one condition or another, certain actions take place. This is the principle on which the smart contract works.

Just as importantly, when working with DeFi-service, the user is always in control of all of his funds. Customers of centralized platforms (whether banks or exchanges) have to trust them with their money, to give it for deposit. In the case of decentralized finance the client connects his own wallet and conducts all transactions directly from it.

The DeFi market is just beginning to develop. Our experts estimate that only 7 million people have used decentralized finance protocols so far. The potential growth of this sphere is estimated to be at least 50 times in the coming years.

In conditions of banking crisis and collapse of centralized giants of crypto-industry, probably, it makes sense to pay attention to the sphere of decentralized finance DeFi. This is a promising industry that is just beginning to develop, and with the right approach, allows investors to work with their assets in a transparent and relatively safe way.

Despite the rise of Dogecoin, the token Lido Staked Ether passed the meme coin in market capitalization and came in at number 8. Crypto Upvotes expert review

The top 10 cryptocurrencies changed with the rise of Ethereum (stETH). The Lido Staked Ether (stETH) token overtook Degocoin (DOGE) in market capitalization on April 14. And in doing so, it climbed to 8th place in the top 10 crypto assets.

Lido Staked Ether is a token issued by the staking platform Lido to users. Who have staked Ethereum. In exchange for inputting ETH, the platform gives out stETH tokens in a 1:1 ratio. They are also used to accrue income from staking.

StETH tokens give users the liquidity of their underlying positions. At the same time, they allow users to trade them or use them to generate additional income through various strategies in decentralized finance (DeFi) protocols.

Lido Staked Ether rose at the same time as Ethereum. According to CoinMarketCap, it rose to $2,100 in 24 hours. Its market capitalization reached $12.5 billion, which matches the price of ETH staked on the Lido platform.

Despite the fact that Dogecoin showed a growth of 6.5% in the last 24 hours. Then the capitalization of stETH exceeded that of the meme coin, pushing it to the 9th place among the leading digital assets.

Rates of native cryptocurrency staking platforms also rose. Lido DAO (LDO) management token gained 7.9% over the day, while Rocket Pool (RPL), an asset of a competing service, added 16.7%.

Our experts assessed whether decentralized autonomous organizations can be recognized as an official form of business governance. After the Arbitrum blockchain project token voting scandal

The issue with the multi-million dollar funding of the Arbitrum project developers’ fund has resulted in a conflict with the owners of its tokens. And it set a precedent in the field of decentralized management of blockchain services.

A DAO is a decentralized, autonomous organization that is governed by the voting of the owners of the blockchain project’s management tokens using smart contracts. Any token owner can independently put forward a proposal for the development of the project. Or vote for other proposals. Most often, they concern the distribution of specially reserved funds – the project treasury .

Before the release of their own token and Arbitrum’s sensational Airdrop, the developers often stressed the need for a decentralized autonomous organization (DAO). In which ARB token holders will be able to choose by voting the directions of the project’s development, including the distribution of budget funds. The only function of ARB tokens is to be able to vote and put forward their own proposals for consideration by the DAO. This is because their owner receives no other technical benefits when interacting with any project in the Arbitrum ecosystem.

Scandal at Arbitrum

Last week, the Arbitrum Foundation. which includes project developers and cronies, put forward a proposal to allocate 750 million ARB (about $1 billion in U.S. dollar equivalent) to the foundation’s own controlled purse for future grants. As well as to cover its administrative and operating expenses. The amount seemed to be too high to the participants. Therefore, about 80% of ARB token holders voted against the proposal.

As it turned out later, even before the voting was completed and without the approval of the participants of the DAO. These funds had already been transferred from the project’s coffers. And some of them were converted into dollars on exchanges or issued as a loan to large market makers. Arbitrum Foundation managers were quick to release a statement saying that the vote was only meant to “ratify a decision that had already been made.” And that further angered both the participating token holders and the cryptocurrency community at large.

The project team’s behavior shows a lack of thought into the financial strategy. Of course, any project needs funds for operating expenses. But they need to be reported on in advance, not post-facto. This is a decentralized organization. Therefore, the opinion of the community must be taken into account. This will be a lesson for the team for the future, our experts say.

Under pressure from FAO members and faced with a wave of negative responses on external resources. Arbitrum Foundation was forced to accept the community’s terms and refuse the offer. And subsequently splitting it into several separate ones and changing the terms in favor of greater transparency. In official publications, the developers acknowledged “communication problems.”

Our experts believe that this event clearly shows how a decentralized autonomous organization can identify problems. Such as corporate abuse, financial manipulation and ineffective financial planning.

Positive and negative aspects of DAO

The Arbitrum Foundation situation has set a precedent and provoked a wave of discussion about the effectiveness of the DAO as such. Despite the lack of a legally recognized form, decentralized organizations are created around many large blockchain projects. And votes from their token owners tend to matter a lot indeed. The process is similar to the decision-making process of shareholders of companies in traditional businesses.

The incident highlights some of the vulnerability of the voting process within a DAO. As well as the mechanism for governing DAOs through voting in general. Due to the lack of conditions enshrined in legally binding documents, questions inevitably arise. For example, is it possible to oblige developers to execute the decision of voting token owners. And on what, apart from the credibility of the project alone, the voting mechanism holds in principle.

Our experts believe that such situations undoubtedly attract the attention of public and government authorities. It can be assumed that they can contribute to the development of a proper legal regulation in the DAO sphere. They can also encourage community and, in particular, investors in such projects to verify the information in more detail. At the same time requiring guarantees of execution of decisions made by a general vote in the DAO.

Opinions of our lawyers

According to our lawyers, the DAO model itself still looks “too utopian for our world”. However, transparency and speed of decision-making are important advantages of DAO. This is due to voting on the blockchain. However, our experts list serious disadvantages. And the main ones are the almost complete lack of legal regulation.

Because in the case of problems, fraud and abuse, the affected persons simply have nowhere to turn. And it is not clear how to get their money back. Decentralization and autonomy from the law are good exactly until they violate the rights of the individual. And then he will seek protection and restoration of his rights through traditional legal mechanisms.

Prospects for DAO development in the ordinary world

Our experts believe that DAO is unlikely to become a recognized legal form of organization in the coming years. This is despite the fact that crypto-assets are already in the legal field in many places. This governance structure makes it difficult to distribute responsibility.

So far, it is just a kind of community, a club of interest. But the potential of this form is very large. Because DAO takes into account the interests of all community members and helps choose the development path for any project.

Of course, progressive company owners will appreciate these advantages and use DAO mechanism. If such a mechanism will be in the legal field. Therefore, our experts believe the co-existence of DAO along with the usual forms of organization is possible. But if it will be properly regulated.

Using onchain metrics, Santiment analysts analyzed recent developments and actions of Whales in the cryptocurrency meme.

Santiment analysts have suggested that Whale is aware of the recent rise of Dogecoin (DOGE). Exploring onchain metrics, they analyzed the movement of the coin’s exchange rate. As well as the actions of its owners.

On April 3, Elon Musk swapped the Twitter logo for the Dogecoin symbol. According to analysts, most of the cryptocurrency community already knows. That if Musk does something on social media, his goal is to have fun, get attention or make money. Perhaps in this case, all three goals were met, Santiment noted.

The day after Twitter’s logo change, the Dogecoin token rate soared more than 33%, temporarily outpacing the growth of other cryptocurrencies. This happened in two waves: the big price jump started and ended almost immediately after the news (from $0.077 to $0.100), followed by the second wave of growth (to $0.102).

Studying transaction data and market indicators, Santiment analysts noted many signals. Which indicated when the big players (who, according to the authors, probably knew about the planned “pumping” of DOGE) were exiting the asset. Or at least recorded large profits.

Santiment explained that when the number of active addresses. As well as the volume of trades and transactions, and transactions of “whales” (addresses with more than $100k) together increase sharply in the period. And when an asset experiences growth independent of other markets, it is possible to assert with confidence. That here almost always forms a local top and fixation of profit at this moment.

Four types of DOGE holders

Analysts have studied the behavior of coin owners, dividing them into four categories based on the number of Dogecoin tokens:

“Fishes” (0-10 DOGE);
“Dolphins” (10 to 10 thousand DOGE);
“Sharks” (10 thousand to 10 million DOGE);
“Whales” (10 million or more DOGE).

According to the study, “fishy” addresses aggressively bought the coin the moment the price peaked. This is typical and is one of the signs of a price peak. “Dolphins” and “sharks” showed no signs of participating in this rally.

Our experts note that “Whales” were buying small quantities of the token in anticipation of replacing the Twitter logo. And as soon as the Dogecoin price jumped, the owners of such wallets fixed their profits.

Santiment suggests that something might have been known to the big DOGE holders. This is just a guess – the identities of address holders are unknown.

A wave of repression by U.S. exchange regulators is affecting the companies behind development of decentralized crypto exchanges. Review by Crypto Upvotes experts

The cryptocurrency exchange dYdX, one of the most popular DeFi trading platforms. It is on its way to becoming a fully decentralized project, not the least of which is the policy of the U.S. government. Right now it’s running on a hybrid decentralized model. But in September, developers plan to launch a new version of it. This should help reduce the influence of centralized structures, on which it still has to rely.

The exchange depends at least on the dYdX Trading behind its development and StarkWare’s solutions for scaling trading capabilities on the Ethereum network. In the new version, dYdX will run on the Cosmos blockchain and leverage its own protocols. This is to minimize reliance on centralized links, any of which could potentially be pressured by regulators.

Decentralized finance (DeFi) projects are characterized by the absence of intermediaries for trading or loan transactions in crypto-assets. An automated protocol, the smart contract, plays the role of an intermediary. However, as in the case of dYdX, the development of this protocol is the responsibility of a specific company and team of developers.

Most DeFi projects issue their own tokens, which are traded on cryptocurrency exchanges. After the head of the U.S. SEC Gary Gensler said. that almost all existing crypto-assets are considered securities by the agency, any token issuer potentially falls under the agency’s oversight.

Repressions from the SEC of epic proportions

Speaking to community members during a conference call on March 30. The head of another decentralized exchange, SushiSwap, Jared Gray. Said he “stopped getting inspired” by his work. Gray spoke candidly about his attitude towards American regulators. In particular, he mentioned Senator Elizabeth Warren’s campaign platform, which included a total ban on cryptocurrency transactions in the United States. Politico published an article about Warren, saying in the headline that she was “raising an army against cryptocurrencies.

The week before, Gray revealed that he had received a subpoena from the SEC regarding his involvement with SushiSwap. To fund the impending lawsuit, Gray brought a proposal to the exchange’s existing Decentralized Autonomous Organization (DAO). In it, he proposed setting aside $4 million from the Treasury of the Record to create a “Sushi DAO Legal Defense Fund.”

“This is about an onslaught and retaliation of epic proportions, and it’s only going to get worse,” warned former SEC official John Reed Stark in a commentary for Bloomberg. Stark served as a senior adviser to the agency. And headed the Internet enforcement offices. He observed that regulators initially left market leaders untouched, focusing on easy-to-access projects. But now they’re targeting the big players as well.

What’s already happened this year

Also earlier this year, the SEC sued the cryptocurrency exchange Gemini because its Earn. Which allows users of the site to earn interest from lending their tokens. The service then fined Kraken exchange $30 million, while equating its stacking service with making money from unregistered securities. Later, the agency banned Paxos from issuing the BUSD token. It was second only to Tether’s USDC and Circle’s USDC in terms of capitalization.

In late March, the SEC accused Tron blockchain founder and Huobi exchange co-owner Justin Sun of artificially inflating trading volumes on the exchange. Just the same day, Coinbase received a notice from the SEC. It threatened to sue over a number of tokens and financial products available on this platform.

Full decentralization is needed to save crypto exchanges

Decentralized exchanges are already passing Coinbase in terms of trading volumes. Uniswap reached $71.6 billion in March, according to The Block Research. This is 45% higher than Coinbase’s $49.4 billion in the same month. Among traditional crypto exchanges, Coinbase is second only to Binance in terms of volume.

Summing up the results of the first quarter of this year Coinbase representatives wrote. That the trends on the exchange reflect a larger market. The actions of the SEC and CFTC only underscore the uncertainty surrounding Ethereum and other altcoins.

Referring to the Coinbase situation, in an interview with Bloomberg, dYdX head Antonio Giuliano says. About more and more cryptocompanies refusing to actively engage with regulators in the U.S. against the backdrop of what is happening. His company, dYdX Trading, will continue to work on the protocol after the launch of the new version of the exchange.

According to Giuliano, the network on which the next version of dYdX will run will work with multiple transaction validators. This is to minimize the risks of being banned or censored, to which the centralized mechanism is subject. The exchange will not technically have the ability to reject or censor transactions.

Our experts believe that the final form for everything in DeFi should be complete decentralization !

Cryptocurrency platforms providing liquid staking services came in second place in DeFi sector by volume of funds sent to them

Staking platforms came in second in terms of funds in the DeFi sector, overtaking lending services. According to DeFi platform Llama, the volume of total blocked value (TVL). Liquid staking platforms exceeded $14 billion, while TVL in cryptocurrency lending protocols is about $13.7 billion.

Liquid staking, allows users to earn from Ethereum stacking without having to make a mandatory deposit of 32 ETH. Users can send any amount of ETH or other Proof-of-Stake cryptocurrency coins to staking. Users will receive tokenized versions of their assets in return. For example, in form of stETH token in a 1:1 ratio. The latter can be used in parallel to generate additional income in DeFi-protocols. At the same time, you will not lose earnings from staking assets in the liquid staking service.

Decentralized exchanges (DEX) lead in terms of funds on DeFi-platforms. TVL on them is $19.3 billion. However, this category includes 716 services. While the staking services whose data is collected by the analytics platform are 71.

Over the last month, TVL of just one stacking protocol Lido increased by $1 billion to $9.3 billion, while this figure for leading DEX is almost twice as low: Curve has $4.9 billion, Uniswap has $4.1 billion, and Pancakeswap has $2.5 billion.

On February 25, the Lido team noted that it recorded the largest daily inflow of funds amounting to more than 150,000 ETH (about $245 million). According to crypto analyst Lookonchain, these funds were contributed by Tron blockchain founder and Huobi exchange chief Justin Sun.

On February 27, cryptoprotocol specialists from 0xScope noted that Sun continues to contribute funds to stake on Lido. Additionally, he sent another 88,000 ETH (about $144 million) there.

Reasons for growth

Our experts point out that the influx of funds into liquid staking protocols is caused by the fact that the Ethereum network is scheduled to start updating Shanghai in April 2023. Which will allow to withdraw previously blocked funds in ETH from staking. After it was revealed in January that developers had decided to focus on this particular upgrade feature, staking platform token rates soared by dozens percent and continue to rise.

Also, the growth in popularity of DeFi-protocols from this category was promoted by rumors about the possible ban on staking in USA. There has been no official confirmation of this yet. But the major U.S. exchange Kraken in early February closed stakng for U.S. customers at the request of the U.S. Securities and Exchange Commission (SEC).

Daily futures trading volume on DeFi platforms reached $5 billion. This is the biggest amount since Terra collapsed in May of this year. Crypto-Upvotes expert review.

DeFi platforms increased revenues amid the outflow of funds from centralized exchanges that occurred due to the collapse of FTX. On-chain data showed an increase in activity on decentralized futures trading platforms and an increase in revenue for DeFi protocols, Cointelegraph reported.

However, not all decentralized applications (DApps) and protocols show such a trend. Because some of them have financial ties to FTX and Alameda. But data on DeFi projects’ revenues show that at least three protocols have exceeded $1 million in the last seven days, including Ethereum and OpenSea Marketplace.

Decentralized futures trading platforms have increased their trading volumes to record levels. Their daily turnover reached $5 billion, the highest since the Terra token crash in May of this year.

Despite the increase in trading volume, the total value of locked-in assets (TVL) at DeFi only increased at seven networks. Gains Network, a futures trading platform on the Polygon network, showed the biggest increase. Its TVL increased 17.3% over the week. And inter-network protocol Ren saw its TVL drop by 50%. This is because Ren worked closely with Alameda. And received quarterly funding and stored its funds directly on FTX.

Blockchain’s profit growth comes on top of an unchanged number of daily active users. Compared to previous weeks, the daily profits of leading blockchains have increased by more than 300%. This suggests that transactions among existing users are occurring more frequently.

Despite growth in profits, only Ethereum made profits among PoS-based blockchains. Other leading networks such as Polygon, BNB Smart Chain and Optimism did not profit. Holders of these tokens suffered inflationary losses.

In what cases is borrowed liquidity useful in DeFi. And also what dangers it brings. And how to borrow for a user who owns Bitcoins. Crypto-Upvotes expert review

Rapid falls and rises in quotations are characteristic of cryptocurrency sector. Part of the high volatility is due to the large share of borrowed capital involved in transactions. Nevertheless, convenient borrowed liquidity is also one of strong points and features of DeFi finance.

Virtually every blockchain ecosystem has its own decentralized finance loan protocol. And the largest blockchains even have several. Such protocols work roughly the same way: by freezing their coins in a smart contract, users can release liquidity. When they receive credit in desired cryptocurrency or stabelcoins, interest accrues on deposit and borrowing. And for using a platform, a bonus is given as tokens to vote on future protocol development. Stablecoin borrowing usually comes at an impressively low interest rate of 1% to 2% per year.

Annual interest rates for coin deposits to the protocol or borrowing are identical for most large and time-tested platforms. Therefore, users can choose a product based solely on the overall usability of a particular blockchain and its software solutions. Thus, if a user, for example, frequently makes coin exchanges on Solana. And on the same blockchain plays some kind of P2E game, then the loan protocol as well, if needed. It will be more convenient for him to choose on the same blockchain.

DeFi borrowing is very easy and fast

This is an extremely convenient and fast process, which speeds up the already rapid movement of liquidity within the cryptocurrency sector.

When the market falls, traders using DeFi loans are forced to close their positions quickly. Because there is a danger of liquidation of collateral, thereby further accelerating the fall. When the market rises, it is also easy for traders to continue to create new buying volume. As the value of collateral assets rises, it makes it possible to increase the size of loans.

Similarly, borrowing protocols have already been used many times in market manipulations to collapse the rate of coins.

Is borrowing a unique advantage of crypto-assets or a dangerous trap?

The practice of borrowing against property or other valuables has been known since ancient times and is still widely used today. However, cryptocurrencies stand out among all other types of assets because of the incredible ease of obtaining borrowed liquidity. And complete freedom of its movement.

Owners of classic stocks in brokerage accounts might object. Because most brokerage platforms also provide credit leverage. Which is based on the capital available to this user. This is true, but there are two key differences that drastically distinguish web2 and web3.

For web2, the annual interest rate on borrowed brokerage funds will be significantly higher. And you will only be able to use the funds conveniently within the original platform. In the case of DeFi, borrowed funds are instantly deposited into the user’s wallet. And immediately can be used and transferred to third-party wallets and services without any restrictions.

When is borrowed liquidity useful?

The most valuable use of DeFi borrowing will be for those wishing to preserve the growth potential of their assets. Since its launch, crypto sector has been in a correction most of the time. Conversely, only briefly at its price peaks. Such moments are easy to miss if you sell an asset when you need dollar liquidity. And hope to buy it again later. And a rapid rise can happen in a few weeks or even days.

Borrowed liquidity can also be particularly useful for emerging market users with small deposits. Who strive to increase their crypto-assets portfolio step by step, if possible. For such category of users, the use of DeFi-protocols allows not to part with crypto-assets during an unfavorable market phase.

Of course, such tools carry a lot of dangers for inexperienced users. It is critical to keep statistics of all borrowings made. As well as to monitor your open positions. Which is based on the ratio of borrowed liquidity to the provided collateral. The safest ratio is no more than 1/3.

We recommend using only the least volatile of the coins, such as ETH or BTC, as collateral. Volatility of BTC has been steadily declining this year, and amid geopolitical instability has fallen below many fiat currencies and even the S&P500 index.

I have Bitcoin, how do I get liquidity and what are these risks?

The crypto sector’s flagship blockchain does not support smart contracts by default. Therefore, the first action for BTC holders on its main network would be to transfer Bitcoin to another network. One that supports DeFi-interactions. It is possible to move to another network in a decentralized way, using one of the bridges. Or by using a centralized exchange. In this case, the user will need to bring your BTCs to exchange, sell them, withdraw amount in main asset of destination network (for example, for Matic it will be Matic). And then exchange the asset back to the “wrapped” BTC on the new blockchain using any of DEX. At the same time, leaving some asset to the network itself to pay subsequent commissions.

Despite the many pros and little studied new ways of using borrowed liquidity. Its use remains extremely dangerous and involves risks every step of the way. Smart contract hacks, credit protocol oracle failures. Which can lead to accidental liquidations. Or the excitement and gambling addiction from feeling the possibility of getting “free funds” . This is just a short list of dangers awaiting users.