#47

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2021

The rise of DeFi

Another year has passed with DeFi setting new records, with total value locked inside protocols rising from around $20 billion in January 2021 to nearly $250 billion in December, according to Defi Llama.

While the Ethereum network became unusable for the majority of retails investors due to skyrocketing transactions fees, users flocked to various alternatives in search for low fees and high yields.

The Ethereum Improvement Proposal (EIP) 1559 was the most anticipated (and arguably controversial) Ethereum upgrade in 2021. Despite the opposition from major mining pools, the update went live in August, introducing so-called ‘base fee’, which is not allocated to miners, but rather is being burned, essentially removing some ETH from circulation.

Following the EIP-1559 Ethereum experienced its first deflationary days when the total supply of ether contracted, due to more ether being burned than mined. And while ether is still an inflationary currency, nearly $5 billion worth of ETH has been burned since the update went live, according to WatchTheBurn.

On one hand, the reduction in supply had a positive impact on the ETH price, benefiting long-term holders. On the other hand, significant price fluctuations usually correlate with high transaction fees, which worsen the network congestion.

As a result of Ethereum’s high transaction fees, other smart contract platforms like Solana (SOL), Terra (LUNA), Binance Smart Chain (BNB), and Avalanche (AVAX) experienced an explosive growth in daily users, trading volume, and total value locked. Early investors in SOL and LUNA saw more than 100x returns in just one year.

While DeFi users have been cheering new records, the US regulators have been tightening the grip over DeFi and cryptocurrencies in general.

In 2021 the US Securities and Exchange Commission (SEC) launched investigations on companies behind major DeFi projects such as:

  • Uniswap Labs - the company that develops largest DEX by trading volume Uniswap (UNI),

  • Terraform Labs — the company behind the Terra (LUNA) blockchain and synthetic derivatives protocol Mirror (MIR),

  • Circle - one of the companies behind collateral-backed stablecoin USDC.

The US SEC has also threatened to sue Coinbase over its planned lending service.

Scaling

Ethereum’s scaling solution Polygon gets more adoption

Decentralized Exchange Uniswap went live on scaling network Polygon (MATIC). In other words, its users can swap tokens on Ethereum, Arbitrum, Optimism, and now Polygon using Uniswap’s official interface.

While Uniswap developers have originally chosen optimistic rollups-based Arbitrum and Optimism as preferred scaling solutions, many competing DeFi projects including SushiSwap have long deployed their contracts on Polygon.

Since Uniswap is governed by the Decentralized Autonomous Organization (DAO) anybody can create a proposal. Eventually, in November Polygon co-founder Mihailo Bjelic has submitted a proposal on the Uniswap forum to deploy protocol’s smart contract to Polygon. UNI holders then voted to approve the proposal and the Uniswap v3 contract has been deployed shortly after.

Internet browser Opera has announced an upcoming integration with Polygon to its built-in cryptocurrency wallet. According to the announcement, the new feature will be available to over 80 million of Android users of the Opera browser in the first quarter of 2022, with future plans to expand the integration to all major devices and platforms.

Earlier in December, Polygon and Reddit co-founder Alexis Ohanian’s venture capital firm Seven Seven Six have jointly launched a $200 million funding initiative to invest in Web3 social media and gaming projects.

Polygon is one of Ethereum’s popular layer-2 scaling solutions that has been criticized for centralization and recently hardforked to fix a critical security vulnerability.

In other news

  • Grim Finance - a compounding yield optimizer built on the Ethereum-compatible Fantom Opera blockchain - has been exploited to the tune of $30 million via a reentrancy attack.

  • Hackers target Telegram users with the Echelon malware by dropping a malicious file into crypto-focused chat rooms. The malware is automatically downloaded to the device without user’s confirmation and can capture screenshots with cryptocurrency seed phrases and other sensitive information. Users are advised to disable Telegram’s built-in auto-download feature.

  • Founder of the Tron blockchain Justin Sun announced he is stepping down from his duties at the Tron Foundation. The foundation itself is set to dissolve in 2022. Sun also added that he will become Grenada’s ambassador to the WTO in Geneva.

  • Cheers to a New Year with tons of exciting news for the crypto space!

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