Kyros Research’s Quarterly Report – Q3 2020

Kyros Research's Quarterly Report - Q3 2020

Overview of the Cryptocurrency Market

The cryptocurrency market has experienced growth during the third fiscal quarter of 2020 (Q3 2020). In particular, this growth can be characterized by two similar metrics, Quarter on Quarter (QoQ) and Year on Year (YoY), whereby QoQ is a measure of change between the fiscal quarter in question and the previous fiscal quarter, while YoY compares the fiscal quarter of one fiscal year with the same fiscal quarter of the previous fiscal year.

With Q3 2020 in mind, the total cryptocurrency market cap has grown 31.8% QoQ and 57.8% YoY, demonstrating a bullish trend over the last 12 months (Figure 1). The trend has primarily been due to the emerging “hot” trends in the crypto space, namely the decentralized finance (DeFi) yield farming and the decentralized exchange (DEX) protocols such as Uniswap. Following the Black Thursday crash in Q1 2020, the market has recovered on the third Bitcoin halving’s wings and the boom of the DeFi yield farming and DEXs.

On the other hand, there is no clear trend identified in the total trading volume over the last 12 months. Nonetheless, there have been some spikes and dips around critical events, as depicted in Figure 1.

Kyros Research's Quarterly Report - Q3 2020
Figure 1: Cryptocurrency market capitalization and trading volume over the last 12 months

In order to delve deeper into the dynamics of the cryptocurrency space, the market share associated with Bitcoin and Ethereum may be analyzed over the last 12 months, as presented in Figure 2.

In this period, BTC dominance has been reducing with the rise of DeFi, mostly associated with the ETH network. Evidently, in Q3 2020, the ETH market cap eclipsed 10% of the total cryptocurrency market cap, reaching the 2020 high of 13.2% in September with the corresponding growth of 23.2% QoQ and 40% YoY. Meanwhile, BTC has been losing its dominance, down from over 67% in Q3 2019 to below 59% in Q3 2020.


Dominance growthETHBTC
Kyros Research's Quarterly Report - Q3 2020
Figure 2: Cryptocurrency market share associated with Bitcoin and Ethereum from Q3 2019 until Q3 2020

Cryptocurrency versus Stocks and Gold

Taking into consideration that Bitcoin has long been considered a store of value and “digital gold,” it is natural to compare the digital asset class with physical gold. For completion, the S&P 500 stock index is also included in Figure 3, whereby YoY returns for the three types of assets are presented for the last four fiscal quarters.

Notably, cryptocurrency has outperformed gold and S&P 500, with a return of nearly 2x that of gold and 6x that of the S&P 500 index. Despite its high volatility, cryptocurrency is still the asset class with the best returns within the relevant timeframe.

Kyros Research's Quarterly Report - Q3 2020
Figure 3: Cryptocurrency asset class’ YoY performance in comparison to that of gold and the S&P 500 index

Interestingly, crypto is increasingly correlated to gold and S&P 500, as shown in Figure 4. This trend started in Q1 2020 when the COVID-19 breakout led to another world economic crisis. Gradually, this trend has become more evident through Q2 and Q3, with the Pearson correlation coefficient approaching 0.9 towards the end of Q3. The high level of correlation between crypto, gold, and S&P 500 is expected to continue while the world searches for a viable COVID-19 vaccine for mass adoption, which is expected to arise during 2021, causing the economy to rebound.

Kyros Research's Quarterly Report - Q3 2020
Figure 4: Correlation between cryptocurrency and gold, and cryptocurrency and S&P500

Overall DeFi Market

The advent of DeFi has resulted in skyrocketing of the Total Value Locked (TVL), representing the amount of currently staked assets within the sector (Figure 5).

Kyros Research's Quarterly Report - Q3 2020
Figure 5: DeFi Total Value Locked in 2020

Figure 5 highlights the total TVL taken on the first day of each month of 2020 to date, demonstrating exponential growth. It is important to note that the TVL value is by no means meant to represent the number of outstanding loans, but rather the total amount of underlying supply being secured by DeFi as a whole.

The main components of DeFi include smart contracts, lending protocols, decentralized applications (dApps), digital currencies, decentralized exchanges, and more. Among these, the DEX sector has been a late bloomer, with its TVL rapidly increasing only since August. With that said, DEX has caught up with the lending trend to form the two main foundations of DeFi.

DeFi Yield Farming

DEXs, based on the Automated Market Maker (AMM) model, has proven to be one of the most impactful DeFi innovations. Among these, the most popular platform today is Uniswap.

In early September, Sushiswap protocol was introduced, realigning incentives for network participants by utilizing revenue sharing and community-driven network effects on the popular AMM model. Thereby, fueled by the favorable SUSHI tokenomics with existing AMM advantages, Sushiswap successfully took $800M in liquidity from Uniswap during its migration.

However, Uniswap responded soon after by rolling out the UNI token in order to beat the competition, while Sushiswap lost early momentum due to the drama associated with its founder, “Chef Nomi.” The order is now set again with Uniswap, Curve Finance, Balancer, and Sushiswap, leading the DEX sector in terms of the TVL (Figure 6).

Kyros Research's Quarterly Report - Q3 2020
Figure 6: Top DEXs in terms of the TVL

Decentralized Exchanges (DEXs)

The DEX sector has experienced rapid growth with trading volume more than doubling every month since June 2020 (Figure 7). In particular, in June, aggregate monthly DEX volume was $1.6B, skyrocketing to $4.3B in July, $11.6B in August, and $23.6B in September.

Such parabolic growth may lead to a trillion-dollar market projection in just a few years; however, there are no certainties. Several factors have to be monitored and evaluated continuously in order to achieve sustainable growth in the DEX sector, namely the smart contract audit quality, sustainable tokenomics, level of decentralization, etc.

Kyros Research's Quarterly Report - Q3 2020
Figure 7: Aggregate monthly DEX volume

In terms of the Uniswap protocol’s dominance, several observations can be made:

  • Uniswap dominance increased from 58% to 65% in August – September
  • Uniswap – Sushiswap battle only increased the prominence of Uniswap
  • Curve captured 22.2% of the market, rising from 16.1% in August
  • The AMM model with token incentivization continues to dominate

Future DEX trends will include new participants and novel infrastructures:

  • The DEX market has a relatively low barrier of entry (compared to CEX) and fosters a healthier ecosystem which welcomes innovative projects such as Serum
  • Built on a high-performance blockchain, Serum has already reported $50M in a volume less than two weeks after launch
  • A DEX “war” on different blockchains can be anticipated, opening up more facilities for end-users

Critical Events

  • Yield farming rollercoaster – Sushiswap incident triggered by “Chef Nomi” cashing out his entire SUSHI holding to ETH, only a few weeks after the DEX historically took $800M of liquidity from its precedent (Uniswap)
  • Kucoin, a well-known centralized exchange, has been hacked. $150M worth of funds has been compromised by a hacker who, as reported by Coindesk, “obtained the private keys to the exchange’s hot wallets.” The exchange is still investigating the incident at the time of writing while announcing that all the stolen customers’ funds will be fully covered
  • CFTC charges BitMEX for illegal activities and anti-money laundering violations. The announcement was made on October 1st.

Expert Commentary (1): When do you envisage the mass adoption of DeFi will happen?

Kyros Research's Quarterly Report - Q3 2020Dr. Long Vuong, Founder & CEO of TomoChain:

“As with any new industry, proof of convenience & time are two crucial factors in deciding its faith. DeFi mass adoption is surely not an exception. DeFi blew up in the last year and a half and has been accepted by more and more banking systems & integrated into different businesses worldwide. The goal is for users to use DeFi products without knowing there is (the) blockchain technology behind it, and eventually turn these financial primitives into a new common financial method. Though I don’t have a specific time, I believe the future does look bright for DeFi mass adoption, especially with the continuous effort for better solutions from many projects.”

Kyros Research's Quarterly Report - Q3 2020Thanh Le, Founder of Coin98:

“I think we might see the DeFi tipping point somewhere in the next 24 months (minimum). 

DeFi can’t go to mass adoption with a very low speed and high gas fees blockchain platform. To get there, the relevant blockchain platforms need to solve the scalability problem first. There are many teams who are working on these solutions currently, e.g., Solana, Polkadot, Ethereum L2…If these solutions become viable over the next 12 months, this will provide a broad foundation for any DeFi applications to be built on top of it, bringing the same user experience as other centralized FinTech applications.

The use case of current DeFi applications is still very limited when compared to traditional banking services. There are a lot of teams who are working on building more innovative protocols for DeFi, e.g., interest rate swap, credits, on-chain futures trading and other derivative protocols.

The benefits that DeFi brings to the end-users are still very limited when compared to traditional services. As long as DeFi protocols can solve the same problem as other centralized finance apps, but in a better and simpler way, users will start to use DeFi more because it will bring more benefit to them.”

Kyros Research's Quarterly Report - Q3 2020Ryan Tian, Co-founder of FinNexus:

“I believe decentralized finance is by far the greatest application of the blockchain technology, and it will come to mass adoption, and accomplish even more than what (the) internet did to transform and upgrade traditional finance. But, there are some problems that need to be solved before that, like gas fees, efficiency, cross-chain applications, protocol securities, enrichment of the ecosystem. I am expecting the mass adoption will be achieved in 3 years.”

Kyros Research's Quarterly Report - Q3 2020Rachid Ajaja, Founder & CEO of AllianceBlock:

“Mass adoption of DeFi will happen once institutional enter to it, and to do so, compliance and regulation need to be taken into account. Being able to do so will bridge the two worlds and will bring mass adoption. User experience is also very important, i.e., the simpler the way we deal with the application, the better are the chances to increase adoption. People do not need to know what a public key or a private key is – they connect with an identifier, and that is it; this is also an important point.”

Expert Commentary (2): How will the yield farming trend evolve in 2020/2021?

Kyros Research's Quarterly Report - Q3 2020Dr. Long Vuong, Founder & CEO of TomoChain:

“The idea of yield farming is to attract liquidity. By locking users’ liquidity into the farming pools, we allow new financial instruments to be built on top of them. People are attracted to yield farming because of the high ROI rate it generates, multiplied even by hundreds, and will continue to follow this type of investment in the long run. As more and more projects come up with their own yield farming protocols, including TomoChain with LuaSwap, users are going to be exposed to a variety of services with different rates and features. Thus, choices are plenty for yield farming to evolve even more in the coming year.”

Kyros Research's Quarterly Report - Q3 2020Thanh Le, Founder of Coin98:

“There will be more sources of yield, mainly coming from derivative protocols, e.g., options trading, futures trading, synthetic assets, lending, borrowing, etc.

Ethereum is the mainland of DeFi in 2018-2020, but starting from Q4, 2020, we might see other blockchain platforms building more yield farming products on their chains, resulting in multichain yield farming.

Farming is unlimited, but user capital is limited. It’s hard to manage the funds efficiently by doing it manually. Users will need a machine to help them manage their funds. Yield farming aggregator is that machine, and we can expect to see the rise of different versions of yield farming aggregators. yEarn is one of the very well-known names in this space.

Finally, more capital will enter into DeFi. More innovation protocols -> More yield farming options -> More yield -> More funding.”

Kyros Research's Quarterly Report - Q3 2020Ryan Tian, Co-founder of FinNexus:

“Yield farming is one of the most interesting creations of DeFi, and I believe it will continue to be an important mechanism to reward the early participants and make token distributions. Yield farming will continue to evolve. It will be more connected to the DeFi business model. Projects purely for farming will be gone. Also, the balance between high APY and the market dumping pressure will be considered. Super crazy APY will disappear from the market. Yield farming is going to be more like the seasoning, not the main course, in most DeFi projects. It can spice up the excitement, but will be less likely to play the main role. Plus, the farming mechanisms and gains will be more flexible, and some may even call it Game-fi.”

Kyros Research's Quarterly Report - Q3 2020Rachid Ajaja, Founder & CEO of AllianceBlock:

“In my opinion, we will see the creation of derivative products on the yield farming since they can bring more investors, but also products that will, for example, hedge against the gas increase, which will have an impact on the amount of users. Multichain farming is the next step also.

This is still a new field and very interesting; we need to keep a close look as something new can happen every day. Now we have a CORE that includes several different approaches, and we see a very high interest in this model. Exciting time :)”

Kyros Research's Quarterly Report - Q3 2020