What We See in the Markets: July 31, 2023

BTC and ETH were both unchanged over the weekend, and down only slightly over the past week (-2% and -1% respectively), showing that crypto has grown up in at least one respect: Summer markets can get slow. There were no surprises coming out of FOMC, and stocks seem to be cooling off a bit, so there is some indication that crypto could remain calm here for a bit. As noted last week, selling BTC or ETH 1x2 to sell some ATMs and pick up cheap skew has been a strong strategy which performs well in a sideways market or a quick sell-off.

There was a significant exploit on Sunday at Curve, with a group of stablepools (mostly ETH-linked stables) at risk due to a re-entrancy buy in Vyper, a programming language used for parts of Curve. Curve’s TVL has dropped by about 25% as LPs are proactively withdrawing assets from what is sup-posed to be one of the safest harbors in DeFi. CRV is down 15% over the weekend, with CVX down about 7%. Some quick thoughts here:

• Curve is probably the most integral lego-brick in Ethereum’s DeFi stack. If traders can’t easily swap between different like assets, DeFi just doesn’t work. As Curve goes, so goes the rest of DeFi.

• Uniswap has made significant progress in stableswap market share, but it suffers as compared to Curve in a pivotal respect; Uniswap offers trading pairs, while Curve supports multi-asset pools, which are more capital-efficient.

• That 25% downtick in TVL, from $3.2b to $2.8b, seems large until you note that Curve TVL was around $20b until the UST depeg (also losing significant volume during the stETH depeg during 3AC and Celsius’ collapse). While TVL dropped a similar amount in March during the USDC depeg, it gained it back fairly quickly. This suggests that current Curve users are fairly sticky, so depending on the resolution of this exploit, we might see that TVL come back.

• USD stablecoins have barely budged. Currently, price-discovery for stables mostly happens at CEX-es and in the OTC market, which is a marked shift from this time last year.

• One of the Curve founders has a large open Aave borrow collateralized with CRV. A few months ago, there was a selloff in CRV ahead of a potential large liquidation. With today’s downtick, there will be eyes on that again.

• It’s interesting that ETH has barely budged off the back of one of its most vital DeFi components fac-ing a major exploit. That could be read as “Sunday during Summer, low attention”, or it could be taken to indicate that the market doesn’t think Ethereum’s DeFi ecosystem, as it currently stands, is a key part of ETH’s value proposition.