Perfect storm leads to big sell-off for Bitcoin and DeFi: Weekly recap

Digital asset markets were on a parabolic surge until investor confidence took a major hit to close out the week with a bearish tilt due to a perfect storm of negativity.

Before reading the rundown, catch up on the most-read stories centered around the price of Bitcoin, the macroeconomic picture and the DeFi phenomenon gaining traction. 

Bitcoin price, stocks and gold plunge in tandem — What’s next?

Don’t panic? ‘Smart money’ whales are waiting to buy Bitcoin at $8,800

Yearn.finance’s $140M yETH vault proves investors are ravenous for DeFi

Bitcoin mirrors gains of past halvings, suggesting $41K price in 2020

⁠Ethereum gas fees reach $500K as ETH price hits a 2020-high at $486

A significant drop in equities markets was led by blue-chip stocks that had been at all-time highs. As this occurred, many tokens tied to DeFi platforms corrected sharply, most notably, SushiSwap (SUSHI) which lost nearly 40 percent of its value. 

 Daily cryptocurrency market performance. Source: Coin360

The correction in traditional markets appears to have influenced Bitcoin’s (BTC) more than 10 percent drop before a small bounce back to the $10.3-$10.4K range. 

More isn’t always merrier

Technology stocks that led US equities to record highs this summer reversed sharply this week, sending the Nasdaq Composite index tumbling almost five percent in its biggest fall since June. 

Apple’s shares lost eight percent — wiping more than $150 billion from the iPhone maker’s value — while Amazon, Alphabet and Microsoft all fell more than four percent. 

As a result, the VIX index jumped above the 30-point mark for the first time since mid-July, and the equivalent volatility index for the Nasdaq shot up to more than 40 points — nearly double its mid-August low.

Historically, the VIX has only surged into the 30s a handful of times in the past and almost always leads to a significant retracement.

It is a reminder that crowded trades bring a lot of volatility when someone begins to unwind their positions. Digital asset traders are more than aware of such dynamics and while the bulls may be feeling particularly salty about the reversal of fortunes, the pull-back offers an opportunity to rebuild.

The futures curve also flattened aggressively as leverage buyers were the first ones to look for cover, and there are plenty of opportunities in the options market to take advantage of market mispricing.

Are DeFi tokens the new pink sheets?

Ethereum transactions soared to multiple new all-time highs for the second time in three weeks and Uniswap V2: Router 2 is now the lead contributor to gas usage, according to Etherscan. The decentralized exchange is followed by Tether (USDT); and then the latest DeFi sweetheart that is SushiSwap: MasterChef LP Staking Pool.

And so, Tether has finally been dethroned from its top spot as the main contributor of gas usage. 

Total value locked (USD) in DeFi. Source: Defi Pulse

The fact that it was toppled by none other than a DeFi platform speaks a lot for the recent growth of the industry and, as it stands, over $9.34 billion is locked across various platforms. Currently, Aave, Maker and Uniswap constitute about $1.5 billion TVL each. 

On the one hand, DeFi is a high risk, high reward market, but so is trading small-cap (pink sheet) stocks. Both clearly have a market, and always will among those with an appetite for risk.

Is relief from high gas fees on the way?

The ongoing focus on DeFi and the recent hyperactivity on Ethereum has resulted in sky-high congestion and gas fees. This led Ethereum founder Vitalik Buterin to point out several solutions through rollups and sharding.

ZK-Rollups are a zero-knowledge proof technique that helps rollup or batch many transactions into a single transaction, and therefore, helps reduce congestion on the Ethereum blockchain. Less congestion means lower fees.

Optimistic and ZK roll ups can increase capacity from ~15 tx/sec to ~3000 tx/sec by doing most of the transaction processing on layer 2. Sharding, on the other hand, increases the capacity of the base layer by ~100x. 

This could lead to a 100x decrease in fees, though realistically in the long term it would not decrease quite as much because the demand for Ethereum is also likely to increase.

The only solution to high transaction fees is scaling and Tether, Gitcoin and other apps are doing the right thing by migrating to ZK rollups. A positive development is that Tether is now planning to add support for another Layer-2 scaling solution (ZK-Rollups).