DeFi Thriving Despite Crypto Crash
No one could've predicted the recent crypto crash we're seeing in the market ... but despite this bear narrative, there are some bullish aspects to this crash as well!
Crypto Made ✨ Simple ✨: Why Blockchains Are Important
The main goal of Bitcoin was to bring decentralization and transparency to the world of finance after the 2008 global financial meltdown. And the way it does this is by using a blockchain.
Without getting into the technical details, the primary use case of a blockchain is to keep a permanent record of transactions that’s accessible to anyone at any time.
If a blockchain isn’t publicly available, I believe it goes against the entire point of the crypto industry.
This is especially relevant right now because of the FTX situation.
Right now, a lot of exchanges have public addresses where anyone can go look at how much crypto they own. For example, you can go onto BitInfoCharts.com and see the largest holders of BTC:
As you can see, five of the top 10 BTC addresses are owned by exchanges such as Binance, Bitfinex, and OKEX.
As for Ethereum, you can see the top addresses via Etherscan:
Several of these are also known to be Binance-owned addresses, as well as fellow exchanges Kraken and Gemini.
The top address is where ETH is staked, and it currently holds about 12.5% of the entire ETH supply.
Unlike most other big, centralized exchanges, FTX had been much less transparent with its holdings.
Clearly, there was a reason for that. If the public knew which addresses belonged to FTX, they likely would’ve been able to tell that there was suspicious activity going on.
As crypto continues to evolve, we also need to see a return back to the basics of what began the entire movement: transparency.
Have We Capitulated?
Last week, I brought up my top fear and greed signal, which can also be used as a capitulation indicator: the percentage of BTC supply currently being held for a profit.
I believe there’s no better way to gauge fear and greed than by seeing how many people are up or down on their investments.
After all, losing money drives fear, and making money drives greed. For a quick update on this substack, watch the video below.
My indicator — which is the seven-day moving average of the percentage of supply held for a profit — has now dipped below 50% and is sitting at 47.7%.
To be clear, this doesn’t mean the bottom is in, but it does mean we’re finally getting down to historical levels.
In the 2014-2015 bear market, it bottomed at 40.2%. And in the 2018-2019 bear market, it bottomed at 40.85%.
Exchanges Respond to FTX 🤔
Nobody knows the contagion effect of FTX and Alameda yet, but I think a lot of that will be revealed over the next couple months.
What we do know, however, is that this entire thing was caused by irresponsible money management.
As I mentioned earlier, using public blockchains improves this situation, as they show a clean history of transaction data.
As a response to FTX’s lack of transparency, we’ve seen several major exchanges post “proof of reserves” which essentially show the public the contents of exchange-owned wallets.
However, this is only part of what we need to see.
For example, it doesn’t matter what coins you own or how much they’re worth if you’re taking out massive loans against them, as was the case with Alameda Research.
If they’re taking out loans against customer deposits, it makes the situation exponentially worse.
If exchanges really want to earn people’s trust, they’d show not only their reserves, but also audited financial statements.
This is why I personally think Coinbase is the most reliable exchange (not financial advice!), as it's the only publicly traded exchange. This means it’s the only one that has to report its financials on a regular basis.
Of course, that doesn’t make it immune to contagion within the industry … but for now, it’s the best we have.
Either way, the public has shown an extreme drop in favor of keeping coins on exchanges. We can see this by looking at the Bitcoin Exchange Net Position Change, which tracks exchanges’ inflows versus outflows over the past 30 days:
In addition to that, just over 12% of all BTC currently sit on exchanges — the lowest amount since January 2018.
On one hand, this highlights the current skepticism surrounding exchanges … but it also reinforces Bitcoin’s scarcity.
With over 0.8% of the entire BTC supply removed from exchanges over the past 30 days, it could even be called an industry-wide bank run, which would lead to issues with smaller, more illiquid exchanges.
How Ethereum Is Weathering the Storm ⛈
There are two key parts to this: the ETH token and the Ethereum ecosystem, most of which is DeFi-related.
First, I want to talk about the ETH token.
It’s easy to get discouraged with the price (after all, losing money incites fear), but just because the price is down doesn’t mean the merge didn’t happen.
And it doesn’t mean EIP-1559 didn’t happen. Because of these two milestones, ETH is now deflationary:
That chart shows that the annualized inflation rate for ETH is now -0.03%, meaning more tokens are being burned than created now.
Here’s how big of an impact the merge has made already (in just 62 days!): If Ethereum was still a proof-of-stake blockchain, the annualized inflation rate would still be 3.545%.
It also compares ETH to BTC, which is seeing annual inflation of 1.716%.
I don’t expect the supply burn to have an impact on day-to-day prices, but ultimately, the market settles on a price based on supply and demand.
Right now, we’re clearly in a period of low demand … but when we inevitably come out of this period, we won’t have constant selling pressure from miners.
Additionally, 12.5% of the supply is locked for staking, which I believe will increase.That drives even more scarcity, which will drive the price of $ETH over the long term.
But How Is DeFi Impacted? 🧐
Moving to DeFi, given everything that’s happened over the past two weeks, DeFi on Ethereum has only gotten stronger.
A lot has happened, but the one thing I hope marks this turbulent year in crypto is how well DeFi protocols have held up compared to centralized exchanges and major hedge funds.
Uniswap remains one of the standouts to me. At the time of writing, Uniswap has over $1.3 billion in 24-hour volume:
To put that in perspective, it’s more than all but two centralized exchanges:
In addition to being the most popular chain for DeFi by far, Ethereum is also scaling successfully during this bear market with Optimism and Arbitrum — its two largest scaling solutions — ranking at No. 6 and No. 8 in terms of total value locked (TVL):
TVL measures how much money is sitting in a blockchain’s apps, such as Uniswap, Compound, Aave, GMX, etc.
Ethereum still has a 58% share of all TVL in crypto, and Optimism and Arbitrum have a combined 3.7%, which is extremely impressive considering most of their progress has been made in a deep bear market.
If you’re not familiar with Optimism and Artbitrum, be sure to check out the Substack where I discussed them.
The Future of Crypto Is Bright ☀️
Over the past 18 months, DeFi on Ethereum has been put through the gauntlet … and it’s passed every single test.
Outside of Ethereum, I was also extremely impressed with the resilience that we saw in the Cosmos ecosystem after LUNA collapsed (LUNA was created on the Terra blockchain, which is/was part of Cosmos).
To me, that’s what separates this bear market from 2018 — real apps with real-world use cases have been developed to improve on areas of the current financial system.
And while 2022 has felt like an eternity, we have to remember that it’s also still very early in this game. Not only are we in the early stages of DeFi, but DeFi itself is only the start of the use cases that blockchains have to offer.
Also, just because prices are down doesn’t mean developers aren’t continuing to build new and better things.
In fact, DeFi was born out of the 2018-2019 bear market, and I’m extremely excited to see which new blockchain applications shine in the next bull run.
I’m bullish on the future of crypto and believe there are BIG gains to capture once the market shifts from bear to bull.
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Any thoughts on ETHE which is trading at a significant discount below ETH?
Thank you.