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:
- SVB banking crisis is the problem DeFi is looking to solve
- Lido wstETH on Polygon as staking becomes more compelling
SVB failure demonstrates issues DeFi is trying to solve
The second largest bank failure in US history, Silicon Valley Bank, highlights key issues that DeFi is trying to solve, including transparency over assets, self custody and fractional reserve banking.
SVB technical failure was the result of an asset liability-timing problem. They had longer-term bonds that could not meet withdrawals when there was a bank run. They also invested customer deposits into Venture Debt, which is an inherently risky asset class. Subsequently, many high-profile tech companies were not able to meet their payroll obligations last week because they could not access their assets.
We saw a knock on effect on the stablecoin market. Over the weekend, Circle’s USD-pegged stablecoin dropped to 88c. This has now thankfully been corrected after FDIC assurances.
Whilst the company has multiple banking relationships, the way stablecoins are implemented matters even more now. DeFi is already offering solutions to these problems with self custody and full digital asset-backing of instruments. Both solutions at a stroke prevent the notion of a ‘bank run’ even being a risk, as the customer has full custody for their assets at any given moment.
For stablecoins, having tokens backed by a diverse set of publicly-traded instruments reduces the likelihood of a single point of failure through a single bank deposit. If every stablecoin is asset-backed rather than using fractional reserve banking deposits, we will have a more stable model. The term of a bond doesn’t matter if you can sell it immediately, resulting in fewer liquidation problems when there is a run on assets.
Fractional reserve banking is having a bad moment. Much of this is driven by asset mismatches as rates rise and sluggish institutions fail to adapt. But technological solutions will play a part here too.
Staking more compelling by the day as Lido open Polygon wstETH
Lido has launched wrapped staked ether (wstETH) on Polygon. Lido has a pretty dominant position in the liquid staking derivative market, with around 80% of the total value locked (TVL) emanating via Lido.
The importance of staking and changes to the Ethereum network have been somewhat forgotten by bigger issues in the crypto market. But a quiet revolution in DeFi is underway as the case for staking becomes evermore compelling.
Liquid staking provides an attractive total return, underpinning why there has been major growth in propositions such as Lido’s. Liquid staking has significant benefits over self staking in that it lowers the barrier to entry for investors and gives greater flexibility.
Wait times and long lockup periods are not ideal, especially as self-custody soars in the wake of various centralized platform failures. Exchange staking requires a level of centralization that may be problematic for many who are concerned about the stability of these operators.
Liquid staking bypasses these issues, allowing users to participate at lower levels while making redemption seamless thanks to derivative token issuance. It provides access to the benefits of staking, i.e. earning a yield, without exposing users to the risks we’ve all come to be wary of in recent months.
Ethereum’s Shanghai update is imminent, now scheduled for early April, but it will likely go live today as the Shapella update on the Goerli test network.
The latest update will allow withdrawals from the Ethereum Beacon Chain and rewards will be automatically sent to withdrawal addresses. This makes the case for staking all the more compelling as we move from rewards promised down the line to clear and confirmed rewards for staking.
The Shanghai upgrade will create some short-term uncertainty (although much of that could be lost in the noise of macro movements as has been the case for some time now) mainly thanks to some long-term validators cashing in on getting access to their ETH back. But the offer of redemption will also enable fresh support from those looking for yield, which could amply offset selling.
