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🦄 Recap: DeFi Week of Aug. 21

Hello Defiers! Happy weekend!

In the battle between The Merge and the Fed it was the latter that had the last word this week. 

Jay Powell’s hawkish stance on the “pain” to come as the central bank raises rates to combat inflation punished the equities and crypto markets going into the weekend. Spooked investors sold off top tokens, with ETH down 10% on the news.

Don’t count out The Merge — or more precisely, the raft of improvements coming to Ethereum in its wake. Even factoring in this week’s selloff, ETH is still trading 41% higher than it was on June 30. With The Merge expected in September, Ethereum’s transition to a Proof-of-Stake consensus mechanism remains the No. 1 story in DeFi. 

As Sam Haig explains, it may not be The Merge but a related development called EIP-4844 that delivers scalability gains for Ethereum. Likewise, Robin Schmidt and his crew explored the question of why The Merge might fail on The Defiant YouTube channel. 

In other news this week, Aleksander Gilbert reported on how online sleuths are finding evidence Dogechain is a pump-and-dump scheme. Owen Fernau unpacked a development that’s been buzzing around DeFi for the last couple of weeks — the third version of Compound. And Sam Haig continued his groundbreaking coverage of the governance drama at SushiSwap. In his latest dispatch, Sam reported on how the community voted to cut the salary of its next “head chef” more than 37%.

With the U.S. government’s sanction of Tornado Cash still reverberating, Camila Russo caught up with Jake Chervinsky, the outspoken head of policy at the Blockchain Association. The lawyer argued in this week’s podcast why the U.S. Treasury’s actions impacted free speech protections and challenged privacy rights in DeFi. 

Meanwhile, Rahul Nambiamopurath continued to crank out his thorough and invaluable primers on DeFi: this week he explained Optimism and Web3. 

Enjoy!

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⍺ DeFi Alpha: Optimize DeFi Lending Yields With P2P Matching on Morpho

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Podcast

🎙 Jake Chervinsky on Tornado Cash Sanctions: The Rightful Outrage and the Need to Further Decentralize DeFi

This week on The Defiant Podcast we speak to Jake Chervinsky, the executive vice president and head of policy at Blockchain Association, a non-profit trade association representing the crypto industry in Washington DC. Jake is one of the most qualified to discuss the US Treasury Department sanctioning Tornado Cash, a development that’s caused shockwaves through crypto.

We talk about what these actions are, who is at risk and what is the significance of it all. Tornado Cash got sacntioned because it was used to launder funds, specifically by North Korea’s Lazarus Group. Still, Chainalysis found that 23% of all activity was linked to illicit funds — a large percentage but also not the predominant use of the platform. We discuss all the legitimate reasons why individuals may want to use a mixer.  

There is an indication that these sanctions go against not just the right to privacy, but potentially also free speech, as an Amsterdam-based Tornado Cash developer recently being arrested for, what looks like, just writing code. Jake provides context to this arrest and on whether constitutional rights were infringed with these sanctions.

The ramifications have been quick and widespread. DeFi users have found themselves locked out of their Tornado Cash accounts while many dApps have blacklisted all wallets with any prior contact to the Tornado Cash smart contract. Jake discusses what the alternatives are for developers and users in DeFi, and what the next steps are.

The Tube

📺 The Defiant Weekly: ⚠️Why The Merge Might Fail

📺 Livestream: Esports joins the block & how to produce The Degen Trilogy

📺 Tuesday Tutorials: TORNADO CASH ALTERNATIVES

📺 Quick Take: HUGE Threat to NFTs!

DeFi Drama

⚔️ Fei Community Up In Arms Over Dissolution Plan

Team Cites Technical Challenges And Future Regulations As Risks

Aleksandar Gilbert delves into the latest tussle in DeFi stablecoin governance.

Amid “mounting technical, financial, and future regulatory risks,” the team behind Fei, the 17th largest stablecoin by market capitalization, is ready to call it quits. 

But their proposal, which would only partially repay victims of an $80M hack and compel Fei holders to redeem their tokens for DAI, the largest decentralized stablecoin, has been met with fury from some of the project’s earliest backers. 

Shortly after the proposal went online Friday, Sam Kazemian, the founder of Frax Finance and an early Fei supporter, called it “a new low for DeFi.” Fei co-founder Joey Santoro is yet to respond to The Defiant’s request for comment. 

Critics say the Fei protocol has the money to fully reimburse everyone that lost money in the April 30 hack. Instead, skeptics claim that the team has proposed a partial redemption for hack victims while retaining much of the project’s remaining capital for themselves. 

Deep Dive

👀 Traders Shun On-Chain Leverage In Volatile Market

Aave and Compound Liquidated Just $850K Of Collateral As Ether Dropped 25%

In which Aleksandar Gilbert analyzes one of the most telling developments in a topsy-turvy market…

DeFi money markets have liquidated tens of millions in crypto collateral following each nosedive in the crypto markets this year. But traders are unscathed in the wake of last week’s industry-wide selloff.

Aave and Compound, two of the three largest lending protocols with a combined $14.6B in total value locked, liquidated just $850,000 of collateral in the past week, according to data from The Defiant Terminal. Ether fell 25% during the period after briefly trading above $2,000 on Aug. 14.

That sum is a far cry from the amounts liquidated during other sharp downturns this year. Meanwhile, centralized exchanges saw over $600M in liquidations last week.

Between June 9 and June 13, Ether lost a third of its value as now-defunct hedge fund Three Arrows Capital sold its digital assets in a last-ditch attempt to remain solvent. On June 13, Aave liquidated more than $34M in collateral, while LUSD issuer Liquity liquidated $22M. Five days later, after Ether dropped below $1,000, Liquity sold off another $77M.

After The Merge

👀 The Merge Won’t Drive Big Scalability Gains For Ethereum, But EIP-4844 Might

Proto-Danksharding Could Boost Throughput Of Layer 2 Rollups By 100x

In our latest article looking at the Post-Merge landscape, Samuel Haig reports on a little-understood scalability innovation…

All eyes may be on Ethereum’s forthcoming transition to Proof-of-Stake consensus, but there is a lesser-known upgrade that’s set to cut Ethereum’s transaction costs, improving scalability – unlike the so-called Merge.

EIP-4844 upgrade is set to introduce ‘proto-danksharding’ alongside the next Ethereum fork following The Merge, which is tipped to boost the scalability of Layer 2 rollups by up to 100 times while paving the way for full sharding to be implemented.

This is key, as Ethereum’s current roadmap is banking the network’s burgeoning Layer 2 ecosystem will handle scalability and fee mitigation, until sharding is implemented further down the track. Sharding will split Ethereum’s computational load across an ecosystem of small chains working in parallel, with Layer 2 chains expected to become the network’s shards in the future.

According to L2fees, simple token transfers cost roughly $0.1 on Ethereum’s leading rollup networks, with swaps estimated at around $0.15. But this isn’t good enough, says Vitalik Buterin, Ethereum’s co-founder and chief scientist, who tweeted in May that transaction fees on L2 must be below $0.05 “to be truly acceptable.” 

Opinion

🏛 Feds Didn’t Just Sanction Tornado — They Forgot Code is Free Speech

Legal Precedent Says Code is Protected by First Amendment

Guest columnist Philipp Pieper argues the authorities ran roughshod over key precedents…

The U.S. Department of the Treasury’s sanction of Tornado Cash on Aug. 8 was a remarkable development. It wasn’t just the sweeping scope of the action. Pulling the plug on an entire crypto platform isn’t something you see everyday. It was the fact that the authorities blacklisted a piece of code — not a person or a corporate entity. 

This is just the latest event demonstrating the long reach of regulators, even in the decentralized precincts of the internet.

We at Swarm, a decentralized exchange based in Berlin, agree with other leaders in crypto that sanctioning Tornado Cash is unconstitutional and a startling act of  overreach from regulators. 

In a 1996 case “Bernstein v. U.S.,” a  U.S. federal court established “source code as speech,” which means it’s protected by the First Amendment of the U.S. Constitution. It is the leading case that applies this hallowed standard to encryption issues. safely protect their customers assets then it’s safe to say its brand as a truly innovative proposition will be tarnished.

Opinion

⚔️ How Maker and Frax Are The Diplomats of DeFi

Stablecoins Face Challenges In Wake Of Tornado Sanctions

Guest writer David Liebowitz explores more important questions around stablecoins…

Earlier this month, the crypto world was rocked by the Office of Foreign Asset Control’s move to sanction 44 addresses associated with Tornado Cash, putting the decentralized protocol on their Specially Designated Nationals and Blocked Persons list. 

With the announcement, it became outright illegal for US citizens to access the privacy-preserving protocol or otherwise face hefty fines and jail time. As a preemptive measure, Centre, the consortium behind USDC, froze $75,000 worth of USDC that were located in Tornado Cash’s smart contracts and nearly doubled the number of their banned addresses. The aftermath of the sanctions has resulted in intense discussions among crypto community members about censorship risks that exist throughout the ecosystem. 

In particular, stablecoins have been a flashpoint of this debate and for good reason. Stablecoins have proven to be one of the most utilized application areas of crypto. Today, there are over $150 billion worth of stablecoins in circulation and tens of billions of dollars in volume. Although the majority of activity comes from traders, stablecoins have been increasingly used for everyday activities such as salaries, remittances, payments, etc. Whatever the case, stablecoin use is growing and will continue to grow as more and more participants are onboarded to DeFi.

BACKLASH Yet, as the shadow of the USDC blacklisting looms, heated discourse online has fueled an array of emotional reactions. Decentralization purists have blasted DAI and FRAX for having USDC as collateral and have espoused alternatives that boast their anti-centralization prowess. Do they have a point though? What good is a stablecoin if it could be censored as simply as with an off switch? The answer is much more nuanced than what has proliferated.

Friday

News
DeFi Explainers

  • What is Web3? Every technology goes through generational cycles, including the internet. When a critical threshold of upgrades is crossed, it marks the beginning of a new generation. This moment, and its significance for the marketplace, can prove confusing. 

Elsewhere

Thursday

News
The Merge
DeFi Explainers

  • What Is Optimism? The breakthrough in blockchain technology stems from its peer-to-peer model. By decentralizing governance and maintenance,  blockchain design has enabled permissionless access without central server control.

Elsewhere

Wednesday

News

  • Aura Capitalizes On Race for Balancer Liquidity Balancer, another automated market maker (AMM) that started as a research project in 2018, is gaining enough steam to attract its own protocol geared towards optimizing native token rewards. 

Elsewhere

Tuesday

News
NFTs
Markets
Elsewhere

💜Community Love💜

Thanking all the amazing Defiers for the support and love this week (and always)!

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🧑‍💻 ✍️ Stories in The Defiant are written by Owen Fernau, Aleksandar Gilbert, Claire Gu, Samuel Haig, Jason Levin, and yyctrader, and edited by Edward Robinson, yyctrader and Camila Russo. Videos were produced by Robin Schmidt and Alp Gasimov. Podcast was led by Camila, edited by Alp.

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