Finance Redefined is UKTN’s DeFi-centric newsletter contextualizing the major events of the previous week. Subscribers receive a copy every Wednesday.
This is one of those weeks when it is difficult to find a central topic for this newsletter. There haven’t been any big scandals or releases, more like a slow grind with a few projects launching new features, others heralding their sophisticated investment round, as every celebrity and their mom keep dropping them. NFT. Snoop Dogg is the latest, I believe?
I guess a good question to ask yourself is, “Why NFT and not DeFi?” The answer is money. NFTs are making huge sums of money for their sellers right now, much like the DeFi yield farming mania of summer 2020. In crypto, money is always the answer.
NFTs also need to pass, but like other past trends in crypto, this current rise may leave a much larger residue than what we started with.
I would say DeFi is in its ‘build up’ phase right now, and that’s why we’re seeing a constant flow of exits and investments, with none of them really rocking the ecosystem. Market conditions are not helping either, as we are still in a faltering phase which must eventually resolve itself. Maybe we’ll get back to running the bulls shortly, maybe we won’t. I came to understand that it is quite easy to time the top of the market, the problem is that there are so many “highs” in a crypto year that it becomes difficult to distinguish a local correction from a peak. global.
Sushi frees Kashi
One of the biggest developments this week has been SushiSwap’s rollout of BentoBox and Kashi, a margin lending platform. What sets it apart from platforms like Compound or Aave is its distinct approach to risk. Kashi uses separate vaults for each pair of loanable assets, which means, for example, that placing Ether in an ETH-SUSHI vault does not allow you to pull UNI from the ETH-UNI vault.
The separate approach allows for greater risk tolerance. A dramatic collapse in the value of a small, illiquid coin affects nothing other than its own vault. This means that SushiSwap can create margin trading pairs for even the smallest of projects without incurring any structural risk. With the upcoming Kashi V2, creating loan vaults will even become without permission, similar to creating AMM pools.
Margin trading is the cornerstone of DeFi. Margin traders who pay for the privilege of shorting your coins (or dollars) into Compound or Aave are the source of your “risk free” return when providing capital. Expanding margin trading to more coins adds the ability for more capital to drive those sweet APY DeFi out across the market.
Aave, Polygon and the importance of stories
Aave and Zapper have just announced an integration into Polygon, the sidechain and layer-two ecosystem formerly known as the Matic Network.
This choice is an obvious consequence of the high gas charges on Ethereum, which have been charging many small users for some time now. However, Aave’s destination is quite curious. Until the rebranding, Matic was an odd mix of a competitor and an addition to the Ethereum ecosystem. It operated a plasma network, but most projects preferred to rely on its smart contract-compatible sidechain.
The Matic sidechain is, in effect, an independent blockchain that simply allows you to link assets from Ethereum. In order to qualify as a proper sidechain, it should have used ETH or at least something like DAI to pay the transaction fees – instead, it uses MATIC tokens. By Matic’s very vague definition, Polkadot, Near, Avalanche, and Binance Smart Chain are all Ethereum sidechains.
But imagine the backlash if Aave announced that he would switch to Near or BSC – that would be seen as nothing less than betraying Ethereum. I’ve seen how projects like Balancer or Curve downplayed their involvement with “the enemy” after agreeing to release news of an integration with an external platform. However, to be fair, those other platforms probably jumped the gun at the announcement as well.
Either way, Polygon’s rebranding and shift to a “Polkadot on Ethereum” strategy is paying dividends for public perception. Although, in practice, switching to Matic is equivalent to switching to BSC for the time being. That may change with future versions of the Polygon SDK and other tech solutions, but storytelling seems to be the primary driver for choosing the scalability platform at this time.
I’d say being “Ethereum Native” is the only reason people even consider using Cumulative Optimists, the “darling” of Layer Two Ethereum solutions that has some impressive shortcomings in use.