Finance Redefined: The slow march forward, March 24–31

Finance Redefined is Cointelegraph's DeFi-centric newsletter contextualizing major events in the previous week. Subscribers receive a copy every Wednesday.

Editor's Note

This is one of those weeks where it’s hard to find a central topic for this newsletter. There weren’t any big scandals or releases, more like a slow grind with a few projects launching new features, others announcing their fancy investment round, while every celebrity and their mother keeps dropping NFTs. Snoop Dogg is the latest, I believe?

I suppose a fair question to ask is, “why NFTs and not DeFi?” The answer is money. NFTs are currently making stupendous amounts of money to their sellers, not unlike the DeFi yield farming mania of the summer of 2020. In crypto, money is always the answer.

NFTs too shall pass, but like other past trends in crypto, this current rise may leave behind a residue that’s much larger than what we started with.

I would say DeFi is in its “accumulation” stage right now, and that’s why we’re seeing a steady stream of releases and investments, without any of them really rocking the ecosystem. Market conditions are not helping either, as we’re still in a wavering stage that needs to ultimately resolve itself. Maybe we’ll resume the bull run shortly, maybe we won’t. I’ve come to understand that timing the market’s top is fairly easy, the problem is that there are so many “tops” in a crypto year that it becomes difficult to tell a local correction from a global peak.

Sushi releases Kashi

One of the bigger developments this week was SushiSwap finally deploying BentoBox and Kashi, a margin lending platform. What distinguishes it from platforms like Compound or Aave is its segregated approach to risk. Kashi uses separate vaults for each pair of lendable assets, meaning, for example, that putting Ether into an ETH-SUSHI vault does not let you draw UNI from the ETH-UNI vault.

The segregated approach allows higher risk tolerance. A spectacular collapse in value of some small and illiquid coin does not affect anything but its own vault. This means that SushiSwap can create margin trading pairs for even the smallest of projects without suffering structural risk. With the upcoming Kashi V2, the act of creating lending vaults will even become permissionless, similar to creating AMM pools.

Margin trading is the lifeblood of DeFi. Margin traders paying for the privilege of shorting your coins (or dollars) in Compound or Aave are the source of your “risk-free” yield when supplying capital. Expanding margin trading to more coins adds capacity for more capital chasing those sweet DeFi APYs across the entire market.

Aave, Polygon, and the importance of narratives

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 an obvious consequence of the high gas fees on Ethereum, which have been pricing out a lot of smaller users for quite some time now. However, Aave’s destination is quite curious. Up until the rebranding, Matic was a weird mix of a competitor and addition to the Ethereum ecosystem. It ran a Plasma network, but most projects preferred to build on its smart contract-enabled “sidechain.”

The Matic sidechain is, in reality, an independent blockchain that simply lets you bridge assets back and forth from Ethereum. In order to qualify as a proper sidechain, it should have used ETH or at least something like DAI to pay for transaction fees — instead it uses MATIC tokens. Under Matic’s very loose definition, Polkadot, Near, Avalanche and Binance Smart Chain would all be sidechains of Ethereum.

But imagine the backlash if Aave announced it would move to Near or BSC — it would be seen as nothing less than betraying Ethereum. I’ve witnessed how projects like Balancer or Curve downplayed their involvement with “the enemy” after agreeing to release news of an integration with an external platform. Though, to be fair, these other platforms were also probably jumping the gun on the announcement.

Either way, Polygon’s rebranding and shift into a “Polkadot on Ethereum” strategy is paying dividends for public perception. Even if, in practice, moving to Matic is for now equivalent to moving to BSC. That may change with future releases of the Polygon SDK and other tech solutions, but narratives seem to be the main drivers of the scalability platform choice right now.

I’d argue that being “Ethereum-native” is the only reason people are even considering using Optimistic Rollups, the “darling” of the Ethereum layer-two solutions that carries impressive usability flaws.

In other news

• Liquity Protocol raises $6M from Pantera and other big players.
• Aave Ventures (and others) invest into derivatives CEX Delta Exchange.
• Kava got ready to release major V5 upgrade, but failed to reach quorum on governance.
• Moonbeam raises $6 million to develop its Ethereum “sidechain” on Polkadot.