Weekly DeFi Digest July 8

Market: Hot Take

Canada Day, followed by the 4th of July in the US, appears to have had a buoying effect on crypto. The charts are finally returning to green as we round out this second week of July. It’s too early to call, but could confidence be returning to the markets following the shakeout that has gripped DeFi in recent months?

Over the course of this week, BTC is up a healthy 10.81% with Ethereum seeing a 15.35% increase. Both assets are sitting comfortably above their psychological supports of USD$20k and USD$1k respectively. Bullish indicators include whales buying the BTC dip and a second successful launch for Ethereum 2.0, this time on the Sepolia network this Wednesday. TVL is also beginning to creep back up for the first time in weeks, surpassing the USD$40bn mark.

News of the Week

Bear Market Contagion Woes Wear

Another week, another update on the illiquidity contagion drama that has gripped DeFi in recent weeks. Following on from 3AC’s spectacular fold last week, Voyager Digital has become the latest fund to succumb. It filed for bankruptcy this Wednesday. Shortly after, the Investment Regulatory Organization of Canada (IIROC) confirmed that trading of Voyager shares on the Toronto Stock Exchange had been halted and that a process of delisting had been initiated.

Voyager Digital was one of a handful of exchanges to recently press pause on customer withdrawals, citing “extreme market conditions”. Troubled Celsius continues to hold on, having paid down USD$120m on a Bitcoin-backed loan and another USD$183m in DAI earlier this week. Elsewhere, FTX closed a deal to acquire similarly beleaguered BlockFi for a $240m last Friday.

The Italian Job: Government Subsidies Aim to Give Italy a Competitive Edge.

The Italian government is the latest to announce major subsidies for the technology that underlies DeFi and crypto. The Ministry of Economic Development released a statement on Tuesday that outlines USD$46m worth of cross-sectoral funding for a range of Web3-driven projects. This development builds upon Italy’s 2019 decree on the legal status of crypto as well as the EU’s recent bids to regulate the industry.

US-based Mexican Fast-food Franchise Adds Crypto to the Menu

Fast food restaurant chain, Chipotle, broke the news last Friday that it will be accepting payments in cryptocurrency across its 3,000 US-based branches. The franchise has partnered up with the digital payment platform, Flexa, to make payment available across 98 different types of cryptocurrencies. Chipotle CTO, Curt Garner, stated that “innovation that will enhance our guest experience, and that includes now accepting digital currency payments.”

Race to Launch Web3-Native Smartphone Heats Up

Ethereum scaling network, Polygon, is officially partnering with UK-based firm, Nothing Tech, to produce a Web3-native smartphone. The phone’s virtual launch is scheduled for July 12th and will include features such as easy access to the Polygon ecosystem and dApps as well as its native Polygon ID user identification service. Only last month, Solana Labs announced its own Web3 smartphone offering.

Shibu Inu Scales Up Activity Ahead of Metaverse Launch

Despite the fallout from the collapse of experimental stablecoin, Terra-UST, memecoin, Shibu Inu ($SHIB), is poised to release its own stablecoin offering ($SHI) later this year. Plans have also been announced for the ecosystem to extend into its own “Shibarium” Layer 2 blockchain and to develop a native reward token ($TREAT) for users. The revamp is tied to Shibu’s preparations for launching its own gaming platform and virtual land holdings within the metaverse.

Crypto 101 - Flash Loans

The below Flash Parody, is sung to the tune of Queen's Flash:

Flash loansAh-ahSaviour of the DeFi universe

Flash loansAh-ahDeFi’s miracle(The unprecedented hacks are no cause for alarm)

Flash loansAh-ahKing of the arbitrage

OK, if today’s topic had an intro song, we feel like it would be a parody of Queen’s Flash. We’re not Weird Al calibre, but we jotted some rough lines above. If you read the lyrics (and maybe hummed a familiar tune) then it should come as no surprise that today’s 101 will be on flash loans.

Flash loans are a form of unsecured loan of digital assets, with smart contracts as the intermediary, to any borrower. But there’s a few caveats. Unlike most DeFi lending that requires deposited collateral and often loans with open terms, flash loans require no collateral and are extremely short term - a single transaction on the blockchain. That means the assets are borrowed, used for actions, and repaid all within one transaction. The flash loan itself is a bit like an if statement, as in if the borrowed funds are repaid by the end of the transaction then the loan never took place.

Who provides the flash loans? There are many providers of flash loans as it can really be any protocol with a large pool of assets, but while there are many large competitors, Aave remains one of the largest.

What are flash loans being used for? The main usage is arbitrage between decentralized exchanges and liquidation of overleveraged loans, which generally facilitates a healthier and balanced ecosystem, but their introduction has also created new attack vectors for Web3.

Due to the infinite nature of flash loan lending, and low capital requirement aside from the associated gas and platform fee, they’ve been used in a myriad of exploits and attacks such as Price oracle manipulation and Protocol governance manipulation.

Similar to the introduction of any new technology, there will be some negative implications, but overall flash loans should be viewed positively. The technology should lead to a more capital efficient market, which will be increasingly important and impactful as we begin to see more day-to-day economic activity move on-chain.

Head over to the Cybrid blog to check out our latest articles!

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• Why a Crypto Bear Market is the Time for Fintechs to Build: While the “crypto winter” is officially upon us, now is not the time to abandon crypto but rather to build in prep for the next bull run.

• Making your card “top of wallet” for your customers: Why you should add crypto rewards to your card program. This piece explores why you might want to rethink your standard cashback offerings in favor of a far more exciting - yet accessible - alternative.

Helpful Guides

You might find the following two guides helpful on your learning journey in Crypto.

• Crypto Tech Primer: Get an understanding of the basics of blockchains, cryptocurrency and decentralized finance

• Fintech Guide to Crypto Products: This is the "Hitchhicker's Guide to Crypto" for fintechs looking to launch cryptocurrency based products

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