6 dimensions explain how the Ethereum network responds to the global market under the impact of coronavirus

Source: ConsenSys

Compile: Unitimes_David

In the past few weeks, the Decentralized Finance (DeFi) protocol has experienced an unprecedented test. Although the global situation has gradually recovered from the COVID-19 crisis, the test of DeFi and traditional finance continues.

On February 12, the Dow Jones, Nasdaq and S & P 500 closed at record highs. A month later, global stock markets triggered a meltdown to curb panic selling, in which the US stock market suffered its biggest one-day decline since the 1987 crash (1). The market performance on March 12 proved that traditional finance and decentralized finance (DeFi) are still closely related . As the traditional market fell on Black Thursday on March 12, the size of the digital currency market also shrank, and the prices of ETH and BTC fell by more than 40% within 24 hours.

In recent weeks, numerous applications, platforms, and exchange teams have shared analytical statistics and demonstrated their efforts to ensure high availability of the system during times of market turmoil. Based on the principle of openness and transparency, this article hopes that by analyzing the performance of the Ethereum network at this unique moment in economic history, we will have a deeper understanding of the future direction of digital networks and finance .

The six conclusions listed below were drawn from market data analysis last month. With the help of ConsenSys' analysis suite Alethio (2), Alethio API (3) and custom report tool (4), we can help us get the answer.

1. Ethereum network computing power remains stable. Miners continue to work

The computing power of the entire Ethereum network refers to the speed of hash operations per second performed by Ethereum miners in order to obtain the nonce of the transaction block. On the most unstable day (March 12), the hashrate on the Ethereum mainnet remained stable at around 170TH / s. In the week of March 12-18, the average daily computing power is about 165TH / s, which is almost the same as the daily average of 167TH / s in March. Compared with other blockchains (such as Bitcoin), Ethereum's computing power has remained stable, while Bitcoin's entire network's computing power has dropped by 20% (5). Overall, this means that during price fluctuations, most Ethereum miners continue to work on the network.

Above: Change of computing power (TH / s) of the Ethereum network in March 2020

2. Gas prices have soared, but soon returned to normal. Ethereum's incentive mechanism works

From March 12th to 13th, due to users competing to cash out or convert ETH into stable coins, the miners were encouraged to preferentially process transactions to be packaged by increasing the handling fee. As a result, the average daily Gas price rose to 78 Gwei and 85 Gwei, respectively. However, in the next few days, the price of Gas returned to an average of about 12 Gwei per day (a small increase also occurred on March 16). This shows that the Ethereum network can cope with the two-day surge in transaction volume .

Above: March 6-16, the average gas price of the Ethereum network (top) and the hourly transaction volume of the Ethereum network (bottom)

3. Decentralized exchange (DEX) trading volume reached a record high without downtime

During the market decline on March 12, the trading volume of major decentralized exchanges (DEX) reached astronomical figures, but there were no major problems, attacks or interruptions . On March 12, major DEXs completed a transaction volume of 550,000 ETH (a five-fold increase from the previous day) and served 6,639 trading users (almost a 50% increase from the previous day). Of the 17 active DEXs monitored by Alethio's dex.watch (6), the transaction volume on March 12 alone reached US $ 70 million, of which Uniswap processed US $ 42 million (7), which is almost the average daily transaction in March 6 times the amount. By March 17, the daily trading volume of ETH and the number of trading users in each DEX had returned to the level before the market collapsed. Panic is real, but short-lived .

Above: The trend of DEX's ETH trading volume (blue bar graph) and number of trading users (green line) in March 2020. Source: DEX WATCH

Above: The trend of ETH trading volume (blue bar graph) and number of trading users (green line) on the Uniswap platform in March 2020. Source: DEX WATCH

In contrast, in mid-March, the American Stock Exchange stopped trading four times . The market fuse mechanism was introduced after Black Monday in 1987, the purpose is to let the latest accurate information flow into the market. The fuse mechanism was updated in 2013 to prevent flash crashes caused by high-frequency trading. However, restricting trading may have unintended consequences that interfere with effective pricing and exacerbate panic selling by traders trying to escape the market. Another interesting data point: Robinhood, a commission-free cryptocurrency trading platform, experienced a technical service interruption in early March. The interruption has nothing to do with the market fuse mechanism, but because the Robinhood infrastructure cannot carry too high a business volume.

4. The interoperable DeFi protocol allows users to quickly interact and transfer assets across platforms

On March 13, the number of active users within 24 hours of DeFi agreement-related activities reached a peak of 9,267, accounting for 11.5% of the total number of users in the first quarter of 80k.

Above: Daily user volume trends for various Ethereum DeFi applications in the first quarter of 2020. Source: ALETHIO

However, compared to the total number of DeFi users, the more interesting is the number of users interacting with multiple DeFi protocols , because they can understand network trends and interoperability between different platforms . Comparing user behavior between January, February and March, it is clear that during the market shock in mid-March, users left from long-term lending transactions and began to be active on DEXs such as Uniswap and Kyber, turning to stablecoins, etc. Safe-haven assets.

Above: Users who interacted with the DeFi protocol 1+ ​​times in January 2020, Source: ALETHIO

Above: Users who interacted with DeFi protocol 1+ ​​times in February 2020, source: ALETHIO

Above: Users who interacted with the DeFi protocol 1+ ​​times in March 2020, source: ALETHIO

"Black Thursday" increased the overlap of users of each DeFi agreement (such as the dense yellow cloud in the March chart above that shows the overlap of users interacting with Uniswap and Kyber), indicating that this part of DeFi users can easily exchange assets and exchange them on the exchange To move between. DeFi protocols like Kyber also aggregates on-chain liquidity resources such as Uniswap and other DEX, so that users can call a single smart contract function to more effectively perform price discovery.

5. The demand for stablecoins is huge. The lack of Dai ’s mortgage test Maker ’s full decentralization commitment, and also the viability of stablecoins secured by cryptocurrencies in the short term

Stablecoin is a crypto asset whose value is linked to fiat currency or a basket of assets to prevent fluctuations. Stable coins like Dai that are collateralized by digital currencies require Ethereum's native token ETH as collateral to be hosted in smart contracts. As digital currency holders maintain liquidity while reducing asset risk, the market value of stablecoins continues to rise.

The following table shows Uniswap's single-day data with the largest monthly transaction volume in the first quarter of 2020. On March 13, more than 80% of Uniswap's trading volume was due to Dai and USDC transactions.
Above: In the first quarter of 2020, DAI and USDC each month had a high transaction volume on Uniswap. Source: ALETHIO

As many people have analyzed, the stablecoin Dai underwent a unique stress test last month . On March 12, we used Codef's DeFi Score (8) to observe a sharp decline in Dai Pool's DeFi score (the score rated the DeFi loan platform based on factors such as smart contract risk, mortgage, liquidity, and centralized risk).

During the market turmoil, users are eager to borrow Dai on platforms such as Compound and dYdX to prevent their CDP (guaranteed mortgage positions) from being liquidated. The drop in ETH price in mid-March caused Maker's Vault (previously known as CDP) to quickly fall below a 150% mortgage rate, generating debt worth more than $ 4 million, while the price of DAI stablecoin remained above $ 1.00 .

The increased Gas fee on the Ethereum network has affected the Maker agreement. The price of MCD-Medianizer on the Maker's chain is stuck in the transaction queue, so the price update is delayed. This allows some Vault owners to save their mortgage debt positions (CDP), but it also means that once the price oracle is updated, other CDPs will be liquidated immediately and completely. In addition, some liquidators conducted debt auctions in advance by raising the handling fee, taking advantage of the delay in feeding prices, and won a total of more than 8 million US dollars of ETH collateral at the price of 0 Dai.

Combining these anomalies, users of the entire DeFi community have put forward discussions on requirements similar to traditional market fusing, and also related to whether these events are inherently anomalous or whether the system works as designed. In the days after the market turmoil, MakerDAO added USDC, a more centralized and stable currency backed by fiat currency, as collateral on the platform, and recently auctioned MKR tokens worth US $ 5.3 million to repay debt, making Dai The exchange rate continues to remain at US $ 1.

Dai's instability caused by price shocks has always been a challenge for the compliance of the DeFi ecosystem. Stable currency still represents a major improvement in traditional payment methods, but stable currency backed by fiat currency is more reliable at least in the short term . The results of the stress test conducted by Maker last month seem to prove that the DeFi protocol does work as designed, but it needs to continuously optimize its currency strategy and price oracle to deal with special liquidity events.

6. Encrypted assets are related to traditional assets, but data transparency is an essential difference

Last month ’s market turmoil greatly proved that there is still a connection between cryptocurrencies and traditional assets , which can be seen in the price correlation chart between the S & P 500, BTC and ETH below.

Above: The blue line indicates the correlation trend of BTC and S & P 500, the gray line indicates the correlation trend of ETH and S & P 500, and the red line indicates the correlation trend of BTC and ETH.


For many investors, cryptocurrencies remain an investment option in a broader portfolio and have not been fully used to hedge the unpredictability and opacity of traditional markets . The continuous improvement in the macroeconomics of attracting users and DeFi (using Dai as an example) means that the decoupling of traditional and decentralized finance (DeFi) will be a longer story.

If you want to talk about the lessons learned from the market shock last month, it is that the availability and transparency of data is critical to the success of DeFi and global finance . The blockchain ecosystem emerged in 2008 as a flagrant counterattack against the lack of transparency issues such as bad assets, zombie banks, and money laundering. Dai ’s lack of mortgage last month was a challenge for DeFi, but for the community, this is immediately visible and can be taken to remedy immediately.

Rick Reider, BlackRock's global chief investment officer, seems to understand the confusion of global market participants well: "If you don't know where the safest asset in the world is, it is almost impossible to know where other assets are." During this period, the transparency of the Ethereum network will continue to help us explore.

Lex Sokolin, Global Head of Global Fintech at ConsenSys recently wrote: "We will get rid of this crisis, this is a new belief system." A new belief about trust, transparency, and perhaps most importantly, the health of our system system.


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Related Links:

(1) https://www.investopedia.com/terms/s/stock-market-crash-1987.asp  

(2) http://aleth.io/  

(3) https://aleth.io/#api  

(4) http://reports.aleth.io/  

(5) https://news.bitcoin.com/hashrate-follows-price-bitcoin-halving/  

(6) http://dex.watch/  

(7) https://dex.watch/exchange/Uniswap

(8) https://defiscore.io/