Finance Redefined is Cointelegraph’s DeFi-centric newsletter that puts key events of the past week into context. Subscribers will receive a copy every Wednesday.
This is one of those weeks when it is difficult to find a central topic for this newsletter. There weren’t any major scandals or releases, more like a slow grind with a few projects launching new features, others announcing their nice round of investment as every celebrity and their mom keeps dropping non-fungible tokens or NFTs. Snoop Dogg it is last, I believe?
I suppose a valid question is, “Why NFTs and not decentralized funding?” The answer is money. NFTs are currently making huge amounts of money for their sellers, similar to the DeFi revenue farming mania of the summer of 2020. In crypto, money is always the answer.
NFTs will pass as well, but like other past trends in crypto, this current rise could leave a residue far greater than what we started with.
I would say that DeFi is currently in the “accumulation” phase, which is why we are seeing a steady stream of releases and investments, without any of them really turning the ecosystem upside down. Market conditions are not helping either, like us still in a wavering phase that should eventually resolve itself. Maybe we’ll resume the bull run soon, maybe not. I have come to understand that timing the top of the market is quite easy, the problem is that there are so many “tops” in a crypto year that it becomes difficult to distinguish a local correction from a global peak.
Sushi releases Kashi
One of the bigger developments this week was SushiSwap finally implements BentoBox and Kashi, a margin lending platform. What sets it apart from platforms such as Compound or Aave is its segregated approach to risk. Kashi uses separate vaults for each pair of loanable assets, which means, for example, that Ether (ETH) in an ETH-SUSHI safe, you cannot pull a UNI from the ETH-UNI safe.
The separate approach allows for a higher risk tolerance. A spectacular collapse in the value of a small and illiquid coin has nothing but its own vault. This means that SushiSwap can create margin trading savings for even the smallest of projects, without running any structural risk. With the upcoming Kashi V2, creating lending safes without permission can become similar to creating automated market maker swimming pools.
Margin trading is DeFi’s lifeblood. Margin traders who pay for the privilege of shorting your coins (or dollars) in Compound or Aave are the source of your “risk-free” return in providing capital. Expanding margin trading to more coins increases the capacity for more capital and chases that sweet DeFi annual percentage return 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 Matic Network.
The choice comes as a clear consequence of the high gas costs on Ethereum, which have been praising much smaller users for quite some time. However, Aave’s journey is quite curious. Until the rebrand, Matic was a weird mix of a competitor and an addition to the Ethereum ecosystem. It ran a plasma network, but most projects preferred to build on its smart contract-enabled “sidechain”.
The Matic side chain is really an independent blockchain that allows you to easily bridge Ethereum assets back and forth. To qualify as a true side chain, it had Ether (ETH) or something like Dai to pay transaction fees – it uses MATIC tokens instead. By Matic’s very loose definition, Polkadot, Near, Avalanche, and Binance Smart Chain would all be side chains of Ethereum.
Now imagine the backlash when Aave announced it was moving to Near of BSC – it would be seen as nothing short of betraying Ethereum. I’ve watched projects like Balancer or Curve downplay their involvement with ‘the enemy’ after agreeing to release news about an integration with an external platformAlthough these other platforms probably jumped on the announcement.
Regardless, the rebranding of Polygon and shift to a “Polkadot on Ethereum” strategy pay dividends for public perception. Even if in practice moving to Matic equates to moving to BSC for now, that may change with future releases of the Polygon software development kit and other technical solutions. Stories seem to be the main drivers for the choice of scalability platform right now.
I would say that ‘Ethereum native’ is the only reason people even consider using Optimistic Rollups, the ‘darling’ of the Ethereum layer two solutions that impressive flaws in usabilityI would say that being ‘Ethereum-native’ is the only reason people even consider using Optimistic Rollups, the ‘darling’ of the Ethereum layer-two solutions that impressive flaws in usability