Will the black swans represented by the "94 incident" in the United States affect the fundamentals of the encryption market?

The first is the indictment of BitMEX last Thursday.

According to Reuters, the U.S. Department of Justice and the U.S. Commodity Futures Commission (CFTC) jointly filed a lawsuit against the encryption exchange BitMEX, arguing that BitMEX violated the U.S. anti-money laundering law, and filed criminal charges against the founder and executives of the exchange. CTO Samuel Reed. The CFTC also plans to file a civil lawsuit to terminate BitMEX’s commodity derivatives business in the United States and demand that it compensate customers.

This incident is vividly known as the US 94 incident. Because BitMEX is known as the world's largest cryptocurrency exchange, the incident also caused shocks to the encryption market. The price of BTC fell by more than 3% in the early morning, and then rebounded to stabilize around $10,600.

There are two arguments for this incident. One argument is that it is beneficial to clear market uncertainties so that the subversive effect of cryptocurrencies in the future can appear more quickly. For example, the disappearance of BitMEX may lead to the formation of a "huge" market in US exchanges and over-the-counter transactions, which will greatly increase the chances of the US Securities and Exchange Commission approving a Bitcoin ETF.

Another argument is that U.S. regulation is “for performance”. September 30th is the annual accounting settlement date of CFTC and SEC, which means that the fines and budgets generated before this date will end. Before the prosecution against BitMEX, the two parties had already had a game negotiation process, so it was more of a result of the breakdown of the negotiation.

Both of these arguments point to some kind of good at the same time. This is different from the 94 incident three years ago, indicating that investors have a stronger consensus on BTC and the encrypted market.

Second, there is the incident of Trump being infected with the new crown.

U.S. President Trump tweeted on the evening of October 1 local time that he and his wife had tested positive for the new crown virus and would begin the isolation process. The moment the news was released, the S&P 500 futures fell 0.8%, and the U.S. futures continued to weaken. The three major stock index futures all fell by more than 2%, and the Nikkei 225 index extended its decline to 1%.

Due to the US dollar denomination and the epidemic, the encryption market has shown a strong correlation with US stocks throughout 2020. Affected by this news and the U.S. stock market, the encryption market ushered in a waterfall. Bitcoin quickly fell by 300 points, a drop of more than 3%, while other currencies were in full swing and continued to plummet.

The interesting thing is that before Trump was diagnosed with the new crown, in addition to the strong correlation between BTC and US stocks, investors also believed that it and gold also showed the same trend. However, on October 5, when Trump sent 18 consecutive tweets to indicate that his situation was improving and the "White House agenda" was restored, US stocks and gold both strengthened, while the crypto market was weak, which is worth pondering.

On the one hand, the risk-aversion attribute of BTC has indeed been strengthened, but it is no longer blind to the market's negative and positive drivers; on the one hand, when the global capital market is plunged into great uncertainty, BTC is not the best investment target; The independent market sector represented by BTC will feed back BTC and the entire market, and the cooling of this sector will drive the entire market down.

Finally, the market short-selling behavior represented by SBF.

On October 7, Shenyu released a screenshot showing that SBF, the founder of FTX, carried out a large-scale mortgage loan. After lending millions of UNI and hundreds of YFI, it was transferred to CEX for short selling. UNI and YFI in the secondary market fell in line with the trend. Under the joint reaction of the market, the single currency fell by more than 10%.

Then the second SBF did the same, continued to mortgage more than 8,000 BTC on Aave, lent 60,000 ETH, million links, and 800yfi, and continued to short in the secondary market by transferring to CEX. This kind of behavior makes the interest of lenders negligible or even negative, compressing the DeFi bubble in a short period of time and even ending the market in advance.

For SBF, this kind of game is not new. On the one hand, he is a quantitative trader, and on the other hand, swing arbitrage by mortgage loans has been popular as early as the BTS period. It’s just that BTS used to rely on internal and external trading, but now the development of DeFi lending makes it feasible to do arbitrage in the entire market, as long as enough chips can be borrowed.

Like he said himself: it might happen sooner or later, so why not now?

On the one hand, this can be used for arbitrage. On the other hand, the reason for SBF’s doing so is that he believes that the current high transaction volume of DEX is unsustainable. Once the existing huge incentives for using DEX disappear, the transaction volume will also decrease. For DeFi, in order to have its own vitality and sustainable scale, it must have a better user experience.

That is the scalability problem. SBF and FTX have been doing this, including SushiSwap under his leadership, which is trying to divert Ethereum. But there is no doubt that this is a labor pain for today's market. Many retail investors have been deeply trapped, suffered heavy losses, and market confidence has been hit.

The three events that occurred during this holiday show that the fundamentals of the crypto market dominated by BTC have not changed. During the hot summer of DeFi, BTC has been rising steadily, and ETH has also reached a new price high in two years. What really caused heavy losses to investors was the rise of new currencies in DeFi, new investors who bought in the secondary market, and how to avoid being harvested by big shorts became a key issue.

If DeFi is as SBF said: the high transaction volume of DEX is unsustainable, liquidity mining is not a long-term solution. So what are the fundamentals of the current DeFi? Will the current slump continue? And will there be another rebound?

According to Messari Crypto’s DeFi Return tracker, the 45 DeFi tokens tracked are up 745% since the beginning of the year and 240% in the past 90 days. Plus, the total value locked across all DeFi platforms is nearing its all-time high, hovering around $11 billion, according to DeFi Pulse.

From this point of view, it seems that DeFi is still the current mainstream, and its revenue performance leads the entire cryptocurrency market. But at the same time, there are also voices of opposition, who think that it is meaningless to lock the total value of DeFi. Because in addition to the existence of double counting, what is more important is that the continuous issuance of new tokens is incentivizing it, and there are still bubbles and moisture in the middle.

The various DeFi indices launched recently have well reflected the current market conditions of DeFi.

Compound’s COMP fell below the lowest price of $127 in August and hit $100; now Yearn Finance’s YFI has also fallen 66% from its all-time high; SushiSwap’s token has entered a death spiral: it peaked in September and After dropping nearly 90%, it's down another 50% since the last news. The Uniswap token also fell below the $3 psychological barrier.

And the point of view is that the sell-off is not over, and the market will not bottom out until everyone starts talking about technological developments and future challenges, while criticizing the overly bullish bull market. In other words, the negative sentiment continues, and there is currently no strong force to support the market rebound.

There are currently two feasible technical solutions, one is Ethereum 2.0 version, and the other is heterogeneous cross-chain. But both options have flaws. Version 2.0 of ethereum will be released in November at the earliest, and it has been several years since ethereum tried to scale. Recently, V God also said that the scalability of the Ethereum base layer still has a long way to go, and it is likely that the expansion of the blockchain base layer will not be possible after many years.

As for cross-chain, Polkadot has a high voice, but the main network has not yet been launched, and it will take time before the real heterogeneous cross-chain interaction.

Beyond that, the high yields of DeFi have fallen severely. Gone are the days when it was thousands of percent at every turn. A representative example is that YFII’s liquidity mining income (APY) has dropped to between 20% and 100%, and even less than 20% is actually obtained, only 18%.

The decline in yields has been accompanied by a massive withdrawal of funds. Funds are most sensitive to the rate of return. Once the income declines or the mining cost exceeds a certain threshold of mortgage lock-up, the funds will be withdrawn from the mortgage. A few days ago, Shenyu announced the withdrawal of mining, and lamented that the era of high yields is over.

As mentioned earlier, when the global capital market is plunged into uncertainty, how to ensure that the encryption market has higher and safe returns? According to statistics, since this year, at least 75 cryptocurrency exchanges have been shut down due to hacking, fraud or disappearing for unknown reasons. In other words, only when the rate of return is high enough to cover these risks, can funds continue to enter the market.

In fact, 18% APY is not a low ratio compared with traditional financial management income. According to Jiang Zhuoer, the income of normal liquidity mining is only about 10%. In contrast, the yield of liquidity mining is still inflated today.