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Analysts' Insights

Analysts' Insights

Grab cheap DeFi tokens or Stick with Bitcoin?

1) There are a few essential lessons from my book ‘Crypto Titans’, which analyses the history of the four crypto bull markets. While the themes of the bull markets have evolved, the tokens of the previous bull market were rarely the high flyers of the next one.

2) If yield farming is a thing when TradFi interest rates are at zero percent, yield farming will unlikely be worth your effort when central banks have raised interest rates above 5%. In that case, a different theme will drive the next bull market.

3) Therefore, it is no surprise that the ‘old’ DeFi yield farming tokens are still caught in bear market beatings.

4) Overnight, the decentralized exchange (DEX), Curve Finance, saw some of its lending and borrowing pools drained by a hacker due to a vulnerability in an old version of the smart contract programming language Vyper that allows everyone to set up ‘factory’ pools. This Curve pool creation ‘factory’ allows any user to deploy a Curve pool, permissionless.

5) Curve is the third largest DEX with a market share of 6% or a monthly trading volume of $3.5bn vs. PancakeSwap's 25% market share ($9b) and Uniswap's 64market share ($37.5bn).

6) Traders provide liquidity to these pools by depositing coins and receiving a share of the transaction fees when other traders exchange one coin for another. This minuscule fee collection for providing ‘liquidity’ can be added up and expressed as a yield - yield farming.

7) A flash loan exploited the reentrancy vulnerability, interrupting the contract's external call before it fully runs its course. $40m has been drained. The Curve DAO (CRV) token declined by -15% and Curve’s TVL declined by -42% overnight. Near the peak of the fourth crypto bull market in early December 2022, TVL for Curve Finance was $24bn but this has now declined to just $1.8bn.

8) Surprisingly, CRV DAO perp futures are still trading at a small premium, indicating that traders are more focused on moving positions away from the DEX (regarding TVL) rather than shorting the token. Unlike Uniswap, the UNI token trades at a +20% premium as traders expect Uniswap to gain even more market share after the CRV exploit.

9) A study showed that more than 50% of Uniswap liquidity providers are losing money due to impermanent loss (IL), fluctuations in the underlying value of the assets being swapped. This IL is often larger than the trading fees collected by liquidity providers.

10) We still prefer strategies around Bitcoin, such as ‘cash extraction’ or ‘replacement’ strategies where traders sell their spot holdings, use 3% of their capital to buy upside calls and receive 5% interest rates on their 97% holdings as we enter the more complex end of the summertime.

Chart: Bitcoin (blue) vs. Curve DAO (CRV) token (white)

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