what is decentralized finance

Here is why strong post-Merge fundamentals could benefit Ethereum price

An increase in staked ETH, lucrative yield on liquid staked ETH tokens and deflationary tokenomics are possible bullish factors for Ether’s price.

The shift of the Ethereum blockchain to a proof-of-stake (PoS) protocol opened new opportunities for developers and investors to explore, including the burning of Ether (ETH). Now, Ethereum transactions are validated through staking rather than mining.

Staking impacts the supply and price dynamics of Ether in ways that are different than mining. Staking is expected to create deflationary pressure on Ether, as opposed to mining, which induces inflationary pressure.

The increase in the total amount of funds locked in Ethereum contracts could also push ETH’s price up in the long term, as it affects one of the fundamental forces that determine its price: supply.

The percentage of newly issued Ether versus burned Ether has increased by 1,164.06 ETH since the Merge. This means that since the Merge, almost all the newly minted supply has been burned through the new burn mechanism, which is expected to turn deflationary when the network sees an uptick in use.

According to Bitwise analyst Anais Rachel, “It’s likely that all ETH issued since The Merge will have been taken out of circulation by the end of this week.”

1/ It’s likely that all ETH issued since The Merge will have been taken out of circulation by the end of this week pic.twitter.com/WqRASUwi4i

— Anais Rachel (@Anais_Rchl) October 27, 2022

While the graph covers the 43 days since the Ethereum Merge, the tokenomics are set up to turn Ether deflationary .

The reduction is attributable to Ethereum’s movement from proof-of-work to proof-of-stake. The total supply difference shows that Ether is still inflationary, with +1,376 ETH minted since the Merge.

*Supply change post-Ethereum Merge. Source: Ultrasound Money*

Ankit Bhatia, CEO of Sapien Network, explained to Cointelegraph how staking impacts supply back in May 2020:

“The retail market would most likely acquire ETH from exchanges like Coinbase, which will probably offer the option for buyers to immediately stake their purchase and further reduce circulating supply.”

There is evidence of an increase in locked Ether. For example, DefiLlama shows that over $31.78 billion worth of Ether is currently locked in smart contracts.

*Total Ether value locked. Source: DefiLlama*

In addition to Ethereum’s PoS-locked tokens, Token Terminal data provides a breakdown of staked tokens throughout the Ethereum ecosystem.

*Estimated locked tokens per project. Source: Token Terminal*

The leading protocols include Uniswap, Curve, Aave, Lido and MakerDao. For example, the total value locked (TVL) on Lido is $6.8 billion, while MakerDao has $8 billion.

Showing an increased interest in proof-of-stake, Ether holders depositing to stake are moving Lido to new heights. Lido’s TVL increased from $4.52 billion before the Merge news on July 13 to $6.8 billion at the time of writing.

As October comes to an end, the TVL continues to increase as many investors lock Ether.

DeFi protocols see an uptick in TVL and daily active users

The TVL and daily active users (DAUs) of Uniswap have been increasing over time. In most cases, the rise in a protocol’s TVL is accompanied by increases in DAUs on the platform. The most likely cause of the increase in TVL and DAUs is the lucrative Ether staking rewards.

*TVL and DAUs for Uniswap. Source: Token Terminal*

An increase in DAUs at Uniswap may trigger more Ether to burn due to an increase in transactions, and it may also help take more Ether out of circulation as Uniswap’s TVL grows. The top pairing on Uniswap with Ether is USD Coin (USDC), which currently provides a 34-plus percent annual percentage yield.

*Top 10 Ether pairings on Uniswap V3 with APY. Source: DefiLlama*

Lucrative staking yields

Ether paired with stablecoins on Uniswap is a top choice for liquidity providers. The pairing is generating, at most, 72.20% APY when looking at Ether paired with Tether (USDT).

It is worth noting that some staking platforms deal with liquid staking derivatives, including Coinbase, Lido and Frax. In such cases, the yield is as high as 7% per year.

Data from EthereumPrice.org shows that Lido pays 3.9% APY, Everstake 4.05%, Kraken 7% and Binance 7.8%.

It is important to note that the rate of return also varies based on the amount invested. Usually, smaller amounts have higher APYs than larger amounts. The yield also depends on the protocol.

For example, validators earn more than those who invest on crypto exchanges and pooled staking. However, validators are required to stake 32 ETH and constantly maintain their nodes, which is a reason platforms like Lido help smaller ETH holders earn.

The increase in Ethereum’s TVL from increased yields, the move to PoS, and DAUs on the top Ethereum decentralized applications could eventually lead to an Ether rally.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.

3 reasons why DeFi investors should always look before leaping

DeFi investing is riddled with potholes. Here are a few tips on how to avoid them.

Welcome readers, and thanks for subscribing! The Altcoin Roundup newsletter is now authored by Cointelegraph’s resident newsletter writer Big Smokey. In the next few weeks, this newsletter will be renamed Crypto Market Musings, a weekly newsletter that provides ahead-of-the-curve analysis and tracks emerging trends in the crypto market.

The publication date of the newsletter will remain the same, and the content will still place a heavy emphasis on the technical and fundamental analysis of cryptocurrencies from a more macro perspective in order to identify key shifts in investor sentiment and market structure. We hope you enjoy it!

DeFi has a problem, pump and dumps

When the bull market was in full swing, investing in decentralized finance (DeFi) tokens was like shooting fish in a barrel, but now that inflows to the sector pale in comparison to the market’s heyday, it’s much harder to identify good trades in the space.

During the DeFi summer, protocols were able to lure liquidity providers by offering three- to four-digit yields and mechanisms like liquid staking, lending via asset collateralization and token rewards for staking. The big issue was many of these reward offerings were unsustainable, and high emissions from some protocols led liquidity providers to auto-dump their rewards, creating constant sell pressure on a token’s price.

Total value locked (TVL) wars were another challenge faced by DeFi protocols, which had to constantly vie for investor capital in order to maintain the number of “users” willing to lock their funds within the protocol. This created a scenario where mercenary capital from whales and other cash-flush investors essentially airdropped funds to platforms offering the highest APY rewards for a short period of time, before eventually dumping rewards in the open market and shifting the investment funds to the greener pastures.

For platforms that secured series funding from venture capitalists, the same sort of activity took place. VCs pledge funds in exchange for tokens, and these entities reside in the ranks of the largest tokenholders in the most lucrative liquidity pools. The looming threat of token unlocks from early investors, high reward emissions and the steady auto-dumping of said rewards led to constant sell pressure and obviously stood in the way of any investor deciding to make a long investment based on fundamental analysis.

Combined, each of these scenarios created a vicious cycle where protocol TVL and the platform’s native token would basically launch, pump, dump and then slip into obscurity.

Rinse, wash, repeat.

So, how does one actually look beyond the candlestick chart to see if a DeFi platform is worth “investing” in?

Let’s take a look.

Is there revenue?

Here are two charts.

*Algorand market capitalization vs. revenue (180 days). Source: Token Terminal*

*GMX market cap vs. revenue (180 days). Source: Token Terminal*

Yes, one is going up and the other is going down (LOL). Of course, that’s the first thing investors look for, but there’s more. In the first chart, one will notice that Algorand (ALGO) has a $2.15-billion circulating market cap and a fully diluted market cap of $3.06 billion. Yet its 30-day revenue and annualized revenue are $7,690 and $93,600, respectively. Eye-raising, isn’t it?

*Algorand protocol data. Source: Token Terminal*

Circling back to the first chart, we can see that while maintaining a $2.15-billion circulating market cap and supporting a wide ecosystem of assorted decentralized applications (DApps), Algorand only managed to produce $336 in revenue on Oct. 19.

Unless there’s something wrong with the data or some metrics related to Algorand and its ecosystem are not captured by Token Terminal, this is shocking. Looking at the chart legend, one will also note that there are no token incentives or supply-side fees distributed to liquidity providers and token stakers.

GMX, on the other hand, tells a different story. While maintaining a circulating market cap of $272 million and an annualized revenue of $28.92 million, GMX’s cumulative supply-side fees have steadily increased to the tune of $33.9 million since April 24, 2022. Supply-side fees represent the percentage of fees that go to service providers, including liquidity providers.

*GMX cumulative supply side fees vs. revenue. Source: Token Terminal*

Issuance and inflation

Before investing in a DeFi project, it’s wise to take a look at the token’s total supply, circulating supply, inflation rate and issuance rate. These metrics measure how many tokens are currently circulating in the market and the projected increase (issuance) of tokens in circulation. When it comes to DeFi tokens and altcoins, dilution is something that investors should be worried about, hence the allure of Bitcoin’s (BTC) supply cap and low inflation.

As shown below, compared to BTC, ALGO’s inflation rate and projected total supply are high. ALGO’s total supply is capped at 10 billion, with data showing 7 billion tokens in circulation today, but given the current revenue generated from fees and the amount shared with tokenholders, the supply cap and inflation rate don’t inspire much confidence.

Before taking up a position in ALGO, investors should look for more growth and daily active users of Algorand’s DApp ecosystem, and there obviously needs to be an uptick in fees and revenue.

*ALGO issuance and inflation data. Source: Messari*

Active addresses and daily active users

Whether revenues are high or low, two other important metrics to check are active addresses and daily active users if the data is available. Algorand has a multi-billion-dollar market cap and a 10-billion ALGO max supply, but low annual revenue and few token incentives present the question of whether the ecosystem’s growth is anemic.

Viewing the chart below, we can see that ALGO active addresses are rising, but generally, the growth is flat, and active address spikes appear to follow price surges and sell-offs. As of Oct. 14, there were 72,624 active addresses on Algorand.

*ALGO active address count. Source: Messari*

Like most DeFi protocols, the Polygon network has also seen a steady decline in daily active users and MATIC’s price. Data from CryptoQuant shows 2,714 active addresses, which pales in comparison to the 16,821 seen on May 17, 2021.

*Polygon active address count. Source: CryptoQuant*

Still, despite the decline, data from DappRadar shows a good deal of user activity and volume spread across various Polygon DApps.

The same cannot be said for the DApps on Algorand.

Right now, the crypto market is in a bear market, and this complicates trading for most investors. At the moment, investors should probably sit on their hands instead of taking kiss-and-a-prayer moon shots at every small breakout that turns out to be bull traps.

Investors might be better served by just sitting on their hands and tracking the data to see when new trends emerge, then looking deeper into the fundamentals that might back the sustainability of the new trend.

This newsletter was written by Big Smokey, the author of The Humble Pontificator Substack and resident newsletter author at Cointelegraph. Each Friday, Big Smokey will write market insights, trending how-tos, analyses and early-bird research on potential emerging trends within the crypto market.