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May 9, 2022

DeFi TVL, UST depeg, Google

Welcome to Swarm Markets’ media memo. This weekly update provides comments from Swarm Markets’ co-founders, Philipp Pieper and Timo Lehes, on key industry news that has caught our eye, plus our own developments. 

Comments available on the following news items:

  • DeFi TVL plummets amid market rout
  • Does UST depeg pose a systemic risk to crypto markets?
  • Google looking at Web3 – finally

DeFi TVL plummet symptom of wider market sell off – Timo Lehes

The total value locked on Decentralised Finance (DeFi) has plummeted according to data from DeFi Llama. The fall is to be expected in the context of wider market falls in recent days and weeks.

It would be churlish to say this is not a crypto problem – it is. But the falls in crypto markets are also symptomatic of a wider sell off in higher-risk assets in a tough economic environment.

In essence, crypto is where it’s at because interest rates are rising, just the same as tech stocks. What is novel about crypto is that we’ve never been here before. But with the market now moving much closer to equities we can have a better idea of what comes next.

While there’s arguably no such thing as ‘normal’ times, typically equities perform well despite rising interest rates as the rising rates are indicative of healthy economic growth. We’re in a very different environment whereby the economic picture is much less clear and this is ultimately what is putting investors in a poor mood. 

The upshot of this is ultimately that we’ll know sooner or later how economies are going to progress once inflation rates begin to normalise. So while there’s going to be an element of ‘hold onto your hats’ for now – ultimately the situation will normalise, as unsatisfying as that must sound for now to investors. 

Should we be worried about systemic risks from the UST depeg? – Philipp Pieper

The UST stablecoin lost its peg to the US dollar this week, raising concerns about algorithmic stablecoins and liquidity issues within the crypto sector. 

While this is not unheard of, it comes at a particular flashpoint for markets and certainly suggests that there are issues for stablecoins ahead. To be clear, the Luna Foundation Guard (LFG) has committed to defending the peg in order to maintain the status quo of the stablecoin, but there are specific problems that arise from this.

What does defending a peg mean in practice? Although this appears to be a crypto issue, it is in fact not that different from a country that chooses to peg the value of its currency to another. A salient example from history comes from the early 90s when the UK was forced to ‘defend’ the pound and its position in the European Exchange Rate Mechanism (ERM) – the precursor to the euro. 

The UK Government was forced to buy enormous quantities of sterling on currency markets to maintain its value in the ERM and ultimately – on what became known as Black Wednesday – was forced to concede its position, leave the ERM and devalue the pound when it no longer became feasible to defend it. 

UST finds itself in a similar position, although the market conditions causing the defence are somewhat different. Any stablecoin, in particular algorithmic ones, that is backed by correlated crypto assets are at risk of adverse price movements when everything else tumbles. Stability for stablecoins can only be truly generated if uncorrelated assets are used to support their price. 

As for the potential for a systemic crypto market issue? UST is the third largest stablecoin by market cap according to CoinMarketCap. But relative to competitors such as Tether and USD Coin it is still a relative minnow. USD Coin is the second largest and more than double the size of UST. 

For now it seems LFG has what it takes to defend it. Its proactivity in doing this suggests it was ready for the moment, which can provide some relief for now. 

Google finally paying attention to Web3 – Timo Lehes

The world’s most powerful search engine – Google – appears to finally be getting its act together on blockchain. It is apparently looking at building a Web3 team which will focus on providing blockchain services to businesses.

There’s a few different implications of this news. The first is that blockchain has become too big to ignore for Google, one of the most important pieces of infrastructure on the internet as it currently exists. This is an enormous vindication for the technology.

It is also a challenge to existing providers in the space, because the internet giant is now coming to eat their lunch. This is going to trigger a major upscaling in the competitiveness of the market which will see winners and losers emerge. 

Finally it adds big questions about the power of decentralisation and whether Google fundamentally agrees with a decentralised web. Part of the USP of Web3 is its decentralised nature. Its very existence is a reaction to the highly centralised nature of infrastructure which the likes of Google preside over.