An overview of what is happening in the crypto markets, summarised daily by Crypto Finance AG Senior Trader Patrick Heusser in the market commentary.
Market commentary
Good Morning!
With the DeFi space cooling off a bit and general markets stabilising, I went through some articles I had had no time to read during the crazy hype.
One of them is from Haseeb Qureshi. It is about how DeFi cannibalises PoS security. Read the article here.
PoS (Proof of Stake)
When I look back to roughly 12 months ago, staking and earning a yield was the hot topic. I do not believe that PoS was suddenly perceived as the better and more secure concept for preserving the value of a blockchain. It rather came up due to the pain involved in the community sitting on various (almost worthless) tokens that did not yield anything. With the incentive to receive a yield when you stake your coins, new projects rushed to advertise a high staking yield and old projects tried to switch to PoS.
For most of these coins, the true or "real" interest rate was still low or even negative due to their emission schedule. Please see the current Messari list of PoS coins.
With the March sell-off and the aftermath rally, the hunt for yield was sort of moved aside, and everybody again started trying to make some money on price speculation. But some projects, e.g. Aave, Compound, and Yearn kept developing different DeFi lego pieces that are needed to build some yield generating products on top of it. One product that emerged was "yield farming". But this time traders did not get involved because they had some capital in coins lying around that did not yield anything; it was pure greed that pushed the TVL (Total Value Locked) up to almost $10 billion (as per defipuls.com).
Even though that bubble popped, there was and still is a story to be learned from this concept.
Reduction of the risk
Now, let us return to my original topic: that DeFi cannibalises PoS security. When the DeFi space comes back (with more and better products) and the TVL grows substantially higher again, there is the risk that investors and traders will see no reason to stake their coins, but rather put them into vaults that earn them much higher returns. Yes, agreed, the risk is also accordingly higher, but there are already some new lego pieces available that can serve to mitigate some risk. See Nexus Mutual here:
Buying insurance for a DeFi contract on https://t.co/Lr88SawHzs creates a NFT (ERC721) bearing a policy for an asset over a set period of time [underwritten by @NexusMutual]. This NFT can be sold/transferred on any NFT marketplace 🤯.
Nice work @AndreCronjeTech! pic.twitter.com/CS7cOi3Ncw
— Washington Sanchez 🦇🔊 (@drwasho) September 7, 2020
I have to admit, I was very sceptical 12 months ago as to if the DeFi space had a future or an actual use case. But now, I believe I can see what could be possible in the future, with more lego pieces and smart developers putting them together and tackling some of the issues traditional finance was never able to solve.
