Trends that shaped Q1'20 and our outlook for the year

The first quarter of 2020 was one of the most active in the history of crypto markets. The year started off on a bullish note, with assets hitting recent highs and metrics like value locked in DeFi hitting record levels, but by March global economic concerns had entered crypto markets culminating in a massive selloff on Mar. 12. Narratives and infrastructure alike were tested in March and as we progress into the second quarter our research team has highlighted the most important takeaways, and future trends for the space.

Stablecoins

Driven by a global flight to safety, and demand for USD, stablecoins saw an explosive Q1’20 with total market capitalization ending the quarter at more than $8 billion. In fact, demand for stablecoins was so strong that more value flowed into the sector in Q1’20 than in all of 2019. Most flows were into Tether, the dominant stablecoin, though others like USDC have started to grow significantly.

One winner in the growth of stablecoins appears to be Ethereum, which recently reached value transfer parity with Bitcoin. Stablecoins now account for 80% of daily transfer value on Ethereum as it has proven to be the issuance platform of choice for new stablecoins.

This growth is likely to continue as Tether moves more of its issuance on to Ethereum and new stablecoin projects are launched throughout the year.

While market volatility saw inflows for many stablecoins it was a negative factor for Dai, the largest decentralized stablecoin. On Mar. 12, 2020, now known as Black Thursday, ether prices plummeted 44% and the Maker system was left with a $4 million shortfall due to issues with vault liquidations.

Overall, Q1’20 was bullish for stablecoins and they are on pace to quadruple growth. This could bring a flood of new liquidity to Ethereum’s ecosystem and further solidify its position as the dominant stablecoin platform.

Read our full Q1’20 Stablecoin report here

Cryptocurrencies

Cryptocurrencies started 2020 on a bullish note, with bitcoin rising 45% to a high of $10,362 early in the year. Bullishness was quickly replaced by fear as the impact of Coronavirus started to ripple through the global economy impacting traditional financial and crypto markets alike.

On Mar. 12, 2020, bitcoin experienced one of its worst single-day declines ever plummeting as much as 50% intraday. The sell-off was so violent that many derivative exchanges had problems keeping up. On BitMEX alone, a total of $1.6 billion of leveraged long positions were liquidated, wiping out nearly all the leverage in the market.

The March selloff severely damaged a long-standing narrative that bitcoin could function as a safe haven or risk-off asset. This turned out not to be the case as correlations between bitcoin and the S&P 500 jumped during these periods of volatility.

As the saying goes, there are decades where nothing happens; and there are weeks where decades happen.

While the macro picture remains unclear for 2020 many cryptocurrencies like Bitcoin, Bitcoin Cash, BitcoinSV, and Zcash are due to undergo their halvings which could be a positive fundamental development, or another chance to see a narrative collapse.

Read our full Q1’20 Cryptocurrency report here

Open Finance

As volatility increased in the first quarter decentralized exchanges (DEXs) benefitted from a jump in trading volumes. A market cap weighted index of top DEX projects returned 20.5% in a market where many assets ended the quarter down.

Decentralized lending, on the other hand, experienced a more bearish quarter with an exploit in the bZx platform leading to a loss of customer funds and the aftermath of Black Thursday creating issues for Maker, the largest protocol in the open finance space. Maker hit historic lows after a string of liquidations andfailed collateral auctionsleft the protocol undercapitalized.

To start the year, total loans outstanding between the two largest lending protocols, Maker and Compound, grew $40 million to a new all-time high at $185 million in February. The subsequent market crash, however, led to a string of liquidations that wiped out around 40% of outstanding debt.

Other areas of the open finance space saw strong fundamental driven gains with prediction markets and oracles ending the quarter higher. Chainlink (LINK) continued to surge after a strong 2019 as it continued to find partnerships as DeFi projects look to avoid more oracle issues. Augur ended Q1’20 up 13% as it moved closer to the highly anticipated launch of Augur v2.

Open finance remains experimental, and the technology continues to evolve at a breakneck pace. As many projects plan to undergo substantial upgrades in Q2’20 these changes could have a major impact on the overall sector.

Read our full Q1’20 Open Finance report here

Smart Contracts

Like other sectors, smart contracts were impacted by macro events across the board. Despite rapid price drops in March, many large projects like Ethereum and Tezos ended the quarter with a positive return.

Gains were largely concentrated in the earlier months of the year with Ethereum experiencing a 44% drop on Black Thursday.

The real story in the sector was the continued war between Ethereum and so-called “Ethereum killers” that are seeking to launch, or have launched, competing smart contract platforms. Many of these projects raised significant funding with the promise of creating a “better” version of Ethereum.

As these new projects launch they will likely be competing with an Ethereum that didn’t exist when development started as Ethereum 2.0 continues to move towards launch. ETH 2.0 will incorporate a host of changes starting with the transition to a proof-of-stake (PoS) model putting it more in line with newer networks like Tezos and Cosmos.

Staking will also be a prominent theme in the next quarter as more exchanges and custodians (and maybe even funds) start to add or bolster their staking platforms. While staking as a service adds a level of convenience casual stakers and small-scale validator services might offload their holdings if thecurrency risk starts to outweigh the staking yield, leaving the more well-funded validators (those with revenue sources outside of staking, like exchanges) to assume greater control over these networks.

A concentration in staking power could have implications for on-chain governance as was seen in recent votes on the Tezos network. While Coinbase and Binance have made it easier for users to stake Tezos they declined to participate in the most recent governance vote which reduced the overall participation rate.

The launch of new smart contract platforms, the early stages of ETH 2.0, and new interoperability developments like the interblockchain communication protocol (IBC) will be important developments to watch in 2020 as new networks look to unseat Ethereum as the dominant smart contract platform.

Read our full Q1’20 Smart Contract report here

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