#24

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Decentralization

GameStop saga pushes for more crypto and DeFi adoption

Following the Big Tech crackdown on Trump supporters after the storming of the U.S. Capitol earlier in January, Americans founded themselves in the middle of the GameStop (GME) scandal, which once again exposed vulnerabilities of centralized permissioned systems - this time in traditional finance.

It all started when redditors spotted that hedge funds sold short more than 100% of GameStop’s shares, trying to bankrupt the company that was struggling to survive amid the pandemic. Retails then started buying GME in mass, trying to trigger a so-call “short-squeeze” — basically forcing hedge funds to buy back GameStop stocks at a much higher price to cover their losses. However, citing customer’s protection and later clearing house issues, popular trading platform Robinhood and a few other brokerage firms temporary halted buying of GME stocks amid a crucial moment in a historical battle between retail and institutional investors. As a result of imposed restrictions, the price of GME plummeted, leaving many no other option but to pursue with legal action.

The incident sparked demand for decentralized permissionless networks, where all participants has equal opportunities. Famous billionaire investor Mark Cuban added fuel to the fire by pointing out that intermediaries like Robinhood pocket huge profits from lending users’ stocks to short sellers, while in decentralized finance the majority of these fees go directly to lenders.

Since the world is ready for decentralized networks, the question is — are these permissionless systems ready for the world?

Let’s explore that in our next story.

Network congestion

Bulls are back, fees are high

American e-car manufacturer Tesla (TSLA) became the largest corporation so far to disclose its massive Bitcoin investment worth $1.5 billion. In addition, the company plans to accept bitcoins as a payment for its products without necessarily converting received digital assets into fiat money.

The announcement sparked another bull run with Bitcoin surpassing Tesla itself by the total market capitalization — $878.18B vs $778.20B at press time. While crypto assets set new price records, the transaction fees follow suit, which brings us to the topic of current scaling situation.

In one of the previous newsletters we’ve already discussed a grim state of decentralized censorship-resistant social media platforms. Unfortunately, despite 4 years of the continuous development since the previous cryptocurrency bull market of 2017, major networks Bitcoin and Ethereum found themselves again unprepared to accommodate a sharp rise in demand.

Average Bitcoin and Ethereum transactions fees spiked above $20, meaning that many DeFi users have to pay from $50 to $100 in gas to interact with decentralized protocols. Bitcoin’s Lightning Network still didn’t get enough adoption, so BTC transaction fees will probably stay high for the foreseeable future. Ethereum’s upcoming Berlin upgrade and later EIP-1559 might slightly reduce the fees, but full onchain scaling - including smart contracts - via sharding is still a few years away. The chances are high that the Ethereum network will also stay clogged for a long time, so we will have to get used to a new reality, the same as we got used to travel bans, lockdowns, and masks.

To finish on a positive note we should mention that current congestion is different from that of 2017, because nowadays we have various second layer scaling solutions, and DeFi projects are rushing to implement them in order to provide a safe haven for their users.

In other news

  • The community behind DeFi protocol Yearn voted to mint additional 6,666 YFI tokens - a 22% increase over the current total supply - in order to fund the development of the project. A few days later, a hacker exploited the Yearn DAI vault, which caused a loss of around $11 million to the vault, while the attacker got away with $2.8 million. After the attack, Tether froze $1.7 USDT stolen in the exploit.

  • Crypto exchange Bitfinex claimed that it fully repaid a loan to stablecoin issuer Tether. Back in 2018, Bitfinex lost $850 million, so its affiliated company Tether lent $750 million to the crypto exchange, which accounted for around one-third of total USDT supply at that time.

  • DeFi privacy protocol Tornado Cash passed its first governance proposal to enable transfers of its TORN tokens, which were initially locked after the retrospective airdrop in December last year.

  • Nigeria’s Central Bank has ordered all financial institutions to immediately close accounts of cryptocurrency exchange operators and other persons and entities dealing with cryptos. Bitcoin gained more popularity among tech-savvy Nigerians amid protests against police brutality in late 2020, especially after the bank accounts of prominent activists have been frozen.

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