First Mover: Ethereum Gets Unplanned Stress Test as DeFi Fever Grows

This column has written in recent weeks about the surprising possibility that cryptocurrency markets might have become the new home for capitalism, in an environment where central banks and governments are intervening deeply in markets while picking corporate winners via emergency aid.

If anything, the ridiculousness of the recent weeks' saga involving the deliciously named startup protocol SushiSwap shows that not only are market signals alive and well in digital assets, but competition is, too.

While from the outside these markets may seem like a den of rampant speculation, the innovative mania now taking place in the fast-growing arena of decentralized finance , known as DeFi, is providing a test of just how much the 11-year-old digital-asset markets can bear.

The proving ground for most DeFi projects is Ethereum, the second-biggest blockchain, preferred by many developers for its facilitation of "programmable money" through "smart contracts" – bits of programming that stipulate conditions under which transactions occur, as well as any outputs.

The ultimate goal of these DeFi systems is to automate the functions of banks and other financial firms, making them less expensive, more efficient and maybe even fairer in their allocation of capital. Put another way, entrepreneurs are trying to make a buck by building things they hope people will use.

DeFi applications have jammed up the Ethereum blockchain, roughly quadrupling median transaction fees, known as "gas," since the start of the year. But as the research firm Dapp Radar points out in a new report, the network's usage has continued to increase.

Gambling applications appear to be getting crowded out, but activity has swelled on decentralized lending platforms like Aave and automated, network-based trading systems like Uniswap and Curve. Total transaction volumes reached nearly $25 billion in August, from less than $5 billion a month earlier in the year.

"High Ethereum gas prices have not affected the DeFi ecosystem yet," the publication wrote in its "Dapp Ecosystem Report" for August.

Nor have the elevated transaction fees sowed many doubts in the minds of investors. While prices for ether, the native token of the Ethereum blockchain, have retreated in recent weeks, they've still nearly tripled since the start of the year, to about $367.

John Todaro, director of institutional research for the cryptocurrency-analysis firm TradeBlock, estimated this week in a report that daily fees collected on the Ethereum network have climbed to an average $5 million a day, implying an annual run rate of about $1.5 billion.

"Users have flocked to trading DeFi tokens as they have become the hottest new sector in the space," Todaro wrote.

Shiv Malik, co-founder of the Intergenerational Foundation think tank, wrote Thursday in an op-ed for CoinDesk that a lot of the DeFi activity might just be "token speculation" and "manufactured out of nothing," with "no actual coffee under all that froth."

But based on the recent data, the market appears to be working. And customers are apparently willing to pay.

Bitcoin Watch

Bitcoin remains trapped in a narrow range of $10,000 to $10,500 for the seventh straight day with both bulls and bears unwilling to lead the price action.

• Eventually, however, the range play is likely to end with a bullish breakout as the on-chain metrics continue to improve.
• The cryptocurrency's hashrate rose to record highs above 140 exahashes per second earlier this week.
• In addition, there is evidence of dip demand, particularly from small investors.
• The number of "wholecoiners" or addresses holding at least 1 BTC have risen to a new life time high of 823,000 this week, according to data source Glassnode.
• A move above $10,500 would imply an end of the pullback from the August high of $12,476 and signal a revival of the broader uptrend.
• "Moving forward, should price stabilize above $10,500, which coincides with the 0.618 fib, a bullish continuation can be expected," according to analysts at Stack, a provider of cryptocurrency trackers and index funds.

Read More: Bitcoin Holds Firm Above $10K But Strong Bounce Proves Elusive

– Omkar Godbole

Token Watch

Ethereum (ETH): Ether balances on exchanges have fallen to a seven-month low on centralized exchanges, potentially suggesting traders are using their tokens to make money from DeFi applications such as yield farming.

SushiSwap (SUSHI): Co-founder of "vampire" protocol tells CoinDesk China his partners on project were "thinking about how to make fast money."

What's Hot

Euro will be overtaken by China's digital yuan if Europe has no central-bank digital currency by 2025 (dGen)

Mastercard releases "virtual testing environment" to help central banks simulate distribution and use of digital currencies (CoinDesk)

Huobi exchange now offering "savings product" paying annualized yield of 3.5% on bitcoin deposits (CoinDesk)

Argo, publicly traded blockchain firm, takes profit hit as costs rise faster than crypto-mining revenue (CoinDesk)

ECB President: Europe has fallen behind in the digital payments game (CoinDesk)

Analogs

The latest on the economy and traditional finance

Former Fed Chair Greenspan says U.S. government's budget deficit is "getting out of hand" (CNBC)

U.S. labor-market recovery stalls as weekly jobless claims at 884K exceed economists' estimate of 850K (CNBC)

With Century 21 closing, New Yorkers are wondering which businesses are next (Wall Street Journal)

Fear and frustration: Europe's wealthy keep wallets closed (Reuters)

The Taliban loves China's money, but can it forget its Muslim gulags? (Nikkei Asian Review)

Japan August exports set for another double-digit fall, core CPI to drop, poll shows (Reuters)

Tweet of the Day