🦄 Recap: DeFi Week of Aug. 14

The Tornado Sanction. It sounds like the title of the next Jason Bourne movie but it’s no thrill ride for DeFi teams — this may be the most challenging regulatory-enforcement development in the history of crypto.

This week our reporters fanned out to cover the impact of the U.S. Treasury Department’s sanction of Tornado Cash on Aug. 8. The Feds say the crypto mixer laundered $7B worth of crypto since its inception, including hundreds of millions of dollars hacked by North Korea’s notorious Lazarus Group.

For DeFi projects, the sweeping action has spurred a flurry of activity to prevent getting sanctioned themselves. Sam Haig plumbed the arcane world of MEV to show how Flashbots is blacklisting wallets and open-sourcing more of its code in response to the enforcement emergency. Robin Schmidt and his crew produced a segment on The Defiant YouTube channel detailing the scramble.

And Aleksandar Gilbert produced a deeply-reported dive on how the DeFi privacy industry is adapting to the new reality, one that takes square aim at one of the core values in crypto. Aleks interviewed devs and lawyers at Aztec Network, Railgun, Polygon and Maple Finance to get the down-low on steps they’re taking to balance thai business models and compliance. One idea getting a lot of attention: Using ZK proofs.

Meanwhile, Owen Fernau trained his sights on an emerging trend in DeFi: Real yield. This is the push to derive solid and reliable revenue from on-chain activity that truly serves a valuable purpose. Protocols such as Redacted, Umami, and GMX are blazing new trails in this space.

Rounding out the week was the latest news from NFT land — and it’s not good. The pop culture juggernaut has hit a serious down cycle, as Sam Haig reports in his story on OpenSea’s plunging trading volume. Still, bright spots remain — yyctrader reports in this week’s NFT roundup that ENS domain names continue to surge.

Enjoy!

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⍺ DeFi Alpha: Profit From Market Turmoil With Liquity’s Stability Pool

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The Tube

📺 The Defiant Weekly: The Great Tornado Cash Debate

📺 Quick Take: Democracy Manifest: $1.6 Billion Burnt

📺 Tuesday Tutorial: Earn and Learn with Vitalik’s favorite stablecoin: RAI

Special Report

🌪 Tornado Sanctions Test Resilience of DeFi Privacy Community

Privacy Mavens Tout ZK-Proofs as Solution for Users and States

Aleksandar Gilbert reports on how the privacy industry is scrambling to sidestep a war with the Feds…

In the wake of the U.S. government’s sanction of Tornado Cash last week, it feels like the Feds have declared war on privacy-first crypto projects. Now several of those ventures are hoping for a truce.

Representatives of those projects say there’s a solution that can benefit all parties — users, protocols, and the state. The solution, they argue, stems from technology that allows a user to conceal blockchain-based transaction history but reveal it on demand by law enforcement.

Jon Wu, head of growth at Aztec Network, a self-styled VPN for Ethereum, said that anti-money laundering protections can be put in place without sacrificing user privacy.

“I think the industry would be ignorant not to think that we could get away with technologies that are not proactively compliant, and I think Aztec and many other privacy networks are committed to finding that middle balance,” he said on a Twitter Spaces discussion hosted Thursday by Forta, a blockchain security firm.

Deep Dive

🍣 SushiSwap May Overhaul its Entire Structure

Drama Builds at DEX as Members Weigh New Revenue Model

Samuel Haig delves into one of the most ambitious reboots in DeFi…

A few weeks ago SushiSwap plunged into controversy when it moved to pay a prospective new “head chef” what many of its members deemed an exorbitant compensation package.

Turns out the drama was only just beginning at the $1.2B decentralized crypto exchange. Now SushiSwap’s community is backing a sweeping proposal to overhaul the project’s DAO, voting process, and revenue model.

The proposal is called Meiji Restoration and it aims to do nothing less than revitalize a DeFi project that has been struggling to find its footing after suffering a leadership crisis and losing ground to rivals such as Uniswap and Curve. SushiSwap’s token has dropped 85% this year compared to a 50% decline at Uniswap.

The plan calls for a new DAO funded by protocol fees and directed by voting shares. It also seeks to introduce Curve-style Vote Escrow (VE) tokenomics in a bid to motivate tokenholders to lock their assets over the longer term. The idea is this would kickstart SUSHI out of the doldrums.

DeFi Trend Report

👀 ‘Real Yield’ Emerges As A New DeFi Trend

Protocols Like Redacted, Umami and GMX Share Revenue In ETH and Stablecoins

In which Owen Fernau chronicles the push to make on-chain activity a true revenue stream…

Whether it’s DeFi 2.0 or ultrasound money, crypto loves its narratives. The latest one is “real yield,” which, like the DeFi trends before it, is being touted in both substantive and vaporous ways.

Real yield is a share of a protocol’s revenue, denominated in a mainstream asset like ETH or USDC, which holders of a protocol’s governance tokens can access by staking or locking them. If this sounds like a dividend, you’re not far off. For many DeFi users left holding governance tokens down 80% or more off all-time highs, cash flow in ETH or stablecoins is a welcome change.

The concept of real yield contrasts with the ponzi-esque APYs of 2021, when people barely batted an eye at four-digit yields. Those returns were broadly fueled by projects’ native tokens, which would be distributed at unsustainable rates in order to attract users’ deposits.

Tornado Impact Report

🌪 Flashbots Blacklists Wallets Swept Up in Tornado Imbroglio

U.S. Sanction of Crypto Mixer Prompts MEV Defense Platform to Open Source

Samuel Haig plumbs the arcane world of MEV to show the impact of the Feds move on Tornado…

On Aug. 17, Hasu, the strategy lead at crypto firm Flashbots, confirmed the project is blacklisting wallets sanctioned by the U.S. Treasury Department, sparking outcry from the Ethereum community.

On the same day, Flashbots announced it would hasten open-sourcing some of its code in response to the U.S. Treasurys sanction of the Tornado Cash protocol last week.

Flashbots specializes in addressing MEV, or Maximal Extractable Value, a maneuver in which validators manipulate the order of on-chain transactions to pocket profits by taking advantage of price differences. Its an arbitrage trading strategy made possible by decentralized blockchains.

Flashbots open-sourced some of its MEV-Boost code in response to the sanctions, highlighting that its U.S.-based team must comply with the legislation. Flashbots said the move will encourage competitions and mitigate a potential single point of failure.

Friday

News

Bored Apes Face Liquidation on BendDAO Amid NFT Bear MarketLending against NFTs was always going to be a risky affair. But naturally, the idea took off last year during a crazy bull run in the digital assets.
Fed Instructs Banks To Report Crypto ActivityRegulators just cant get enough of crypto. Just eight days after the U.S. Treasury sanctioned Tornado Cash, the Federal Reserve is asking all regulated banks to keep it informed about all crypto-related activities.
Solend Cranks Up The Risk with Liquidity Pools For AllIn a move that’s bound to raise eyebrows, Solend just launched “permissionless liquidity pools” that lets anyone play banker.
Safe Proposes Airdrop for 22K UsersSafe, the protocol recently rebranded and spun off from parent company Gnosis, announced plans to airdrop its SAFE token to almost 22,000 crypto wallets.

Exploits

Crypto Hackers Bagged $2B This Year as Exploits Jumped 58%: ReportCrypto may be slumping but its a bull market for hackers and other bad actors who stole $1.9B worth of assets from projects this year, according to a report released this week by Chainalysis.

NFT Roundup

Demand for Ethereum Domain Names SurgesDemand for .eth addresses shows no sign of slowing down. On Aug. 16, the Ethereum Name Service (ENS) crossed the milestone of 2M registered domains as the blockchain-based protocol recorded 378,804 purchases in July.

Elsewhere

Thursday

News

Coinbase CEO: Would Exit Staking Biz If Forced To Censor TransactionsAfter several days of mounting pressure, Coinbase co-founder and CEO Brian Armstrong said that he would rather shut down the company’s Ethereum staking service than comply with a government order to censor sanctioned transactions.
Uniswap Foundation Proposal Clears HurdleVoting is underway on a proposal to create the Uniswap Foundation (UF), a new organization that will, if passed, “support Uniswaps decentralized growth, reinvigorate governance, and serve as an advocate for the protocol.”
Fractional Raises $20M And Rebrands To TesseraDespite the bear market, institutional investors continue to place bullish bets on NFTs. Tessera, a collective NFT ownership platform formerly known as Fractional, has raised $20M in a Series A funding round led by Paradigm, a major venture fund with over $10B in assets under management.

Markets

Crypto Markets Falter As Investors Digest Fed MinutesCrypto markets are on track for a fourth day of losses as investors mull over weaker-than-expected U.S. retail sales and minutes from the Feds July meeting.

Elsewhere

Wednesday

News

OpenSea Volume Sinks to 13-Month LowIn a sign the NFT market is enduring a brutal winter, OpenSea’s trading volume plunged to its lowest level in 13 months on Tuesday.
Jump Crypto To Overhaul SolanaJump Crypto will work with the Solana Foundation to develop a new open-source validator client for Solana in an effort to boost the speed and reliability of the network.
Aave May Shun Post-Merge PoW Ethereum ForksAave may shift exclusively to the Proof-of-Stake version of Ethereum that will be rolled out after completion of The Merge on Sept. 14.

Elsewhere

Tuesday

News

Dev Estimates Exact Timing of The Merge First, it was the third quarter. Then it was sometime in September. Now, we know that The Merge, the most sweeping upgrade in Ethereums history, will likely take place on Sep. 15.
Royalty-Free Sudoswap Is Finding Favor With NFT TradersWith all the regulatory news threatening fundamental tenets of DeFi, it’s easy to forget about NFTs. Not everyone has forgotten, however, as NFT traders pushed cumulative trading volume on sudoAMM, a recently launched NFT marketplace, over $10M on Aug. 11.
Acala To Burn $1.2B aUSD After Minting BugThe Acala blockchain is poised to destroy more than $1.2B in erroneously minted tokens. Acala Dollar (aUSD), the network’s native stablecoin, lost its dollar peg in UST-esque fashion on Saturday after a bug caused the network to erroneously mint over 1.2B aUSD.
SBF Eyes Huobi In Potential Billion Dollar DealLeon Li, the founder of Huobi, the world’s 13th largest crypto exchange, is reportedly looking to sell his near-60% stake in the exchange for over $1B.

Tornado Fallout

Growing List Of DeFi Apps Ban Tornado Cash UsersSeveral dapps on Ethereum have started to ban users in the wake of sanctions levied on Tornado Cash. Major protocols currently include Circle, dYdX, Aave, Uniswap, and Balancer.

DeFi Explainers

What Is an Airdrop?Airdrops are one of the most popular features in crypto. In exchange for minor social media engagement, airdrops allow users to receive free cryptocurrencies in their wallets.

Elsewhere

💜Community Love💜

Thanking all the amazing Defiers for the support and love this week (and always)!

Amazing experience presenting at @ethlatam!! 🙌

thank you for having me and congrats on putting together one of the best events I’ve been to. Here’s to the next one!! 🥂

Come to Argentina to see what it’s like when crypto is mainstream (and also to 🥩🍷💃) pic.twitter.com/Qtz8BaydTI

— Camila Russo (@CamiRusso) August 14, 2022

🧑‍💻 ✍️ Stories in The Defiant are written by Owen Fernau, Aleksandar Gilbert, Claire Gu, Samuel Haig, Jason Levin, and yyctrader, and edited by Edward Robinson, yyctrader and Camila Russo. Videos were produced by Robin Schmidt and Alp Gasimov. Podcast was led by Camila, edited by Alp.

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