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How Market Volatility Is Shining a Light on DeFi’s Structural Vulnerabilities

How Market Volatility Is Shining a Light on DeFi’s Structural Vulnerabilities

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What weaknesses did the Black Thursday and high market volatility reveal for the decentralized finance industry?

On March 12, United States President Donald Trump gave a 10-minute speech on COVID-19 that, coupled with the World Health Organization’s official declaration the day before that the outbreak was now a pandemic, sparked panic across global markets.

Investors rushed to the safety of cash, and no cryptocurrency was immune from the mass sell-off. The total market capitalization of the cryptocurrency sector plummeted by over 25% in a span of hours. Bitcoin (BTC), despite its reputation as a safe haven, fell by 48% in a span of 24 hours. Ether’s (ETH) loss of 43% was its worst one-day performance.

While cryptocurrency prices have rebounded in the interim, the decentralized finance sector has continued to feel the repercussions of “Black Thursday.” As a result of ETH’s sudden losses, millions of dollars' worth of value was liquidated and DeFi applications temporarily stopped functioning.

Price volatility is inherent to cryptocurrency investing, but mass liquidations and faulty applications mustn’t become the norm for DeFi. Its foundational philosophy is the removal of centralized intermediaries in the financial system, but this lofty goal will be unobtainable if the mechanics of DeFi are breakable. Crypto assets will always be volatile, and DeFi’s infrastructure must be shored up to withstand day-to-day price changes, no matter how dramatic.

Related: DeFi Begins to Move From a Niche Market to Mainstream Finance

As a starting point, the DeFi community must address three key pain points that are interconnected:

  • The DeFi space is overly reliant on Ethereum assets.
  • Liquidation-based approaches to cross-chain value transfers are dangerous.
  • Multisignature and multiparty computation mechanisms are insufficient for ensuring liveliness and safety in DeFi environments.

Each of these points warrants deeper analysis.

DeFi’s Ethereum dependence poses systemic risks for the sector

A common mantra in the world of financial advice is to avoid “putting all of your eggs in one basket.” In other words, holding a diversified portfolio ensures that you won’t lose too much money if a particular sector of the economy crashes.

In the DeFi sector, all eggs are in Ethereum, which controls the fortunes of DeFi applications and investors alike. For example, users of popular systems like MakerDAO mostly use Ethereum as collateral. When flash crashes of Ether happen, users scramble to recollateralize and the network becomes congested. This makes the DeFi sector uniquely vulnerable to fluctuations in Ether’s price and network congestion. For DeFi systems to scale, these systems need access to larger market-capitalization assets like Bitcoin, as well as a more diverse range of cryptocurrencies.

For instance, when ETH’s price tanked on Black Thursday, the outcome was predictably dire. Users of MakerDAO lost millions of dollars (more on that shortly), oracle prices lagged and applications like dYdX and Nuo had to alter their fees to force through delayed trades. This sequence of events was not without precedent: Ethereum’s network suffered similar congestion in 2017. Notwithstanding these problems, Ethereum is and should remain an important cog in the DeFi ecosystem, and the protocol’s plans for ETH 2.0 will hopefully help. 

Related: Vitalik Buterin Reveals Ethereum 2.0 Roadmap to Cointelegraph

But in order to thrive and scale its community, DeFi applications should look toward cross-chain assets enabled by generic interoperability, which would allow collateralization with any crypto asset in return for any other crypto asset. Generic interoperability will provide greater liquidity for DeFi applications, mitigate ETH price exposure risk and lessen DeFi’s dependence on the Ethereum network.

Broadening DeFi’s range of cross-chain pairs will be especially important for spurring mass adoption. When stablecoins like Libra, Celo and even China’s digital yuan come online, cross-chain liquidity can serve as a bridge that encourages crypto novices to buy their first Bitcoin, Ether or other decentralized assets as a means of taking out stablecoin loans.

A liquidation-based approach to interoperability is dangerous

The Black Thursday experiences of MakerDAO and Compound, two of DeFi’s most popular protocols, offer an instructive case study into why liquidation mechanisms pose risks for DeFi participants.

When ETH’s price began plummeting the evening of March 12, MakerDAO’s oracles — the automated bots that ascertain price information for lenders and borrowers — were unable to cope with the speed and severity of the price crash. MakerDAO’s users were desperate to recollateralize their loans, but severe network congestion and outrageously high gas fees prevented them from both depositing more ETH (to maintain their 150-to-100 collateral-to-loan ratio) and paying back their Dai, resulting in $4.5 million of liquidations at absurdly cheap prices for liquidators. Compound suffered similarly with its highest number of liquidations at over $4 million, mostly in collateralized ETH.

Beyond Ethereum’s role in this debacle, it is worth focusing on this liquidation-based approach to decentralized finance. When network problems arise, liquidation-based mechanisms can wreak havoc on unsuspecting users. Positions cannot be recollateralized in time, loans cannot be repaid, oracles cannot update their prices, oracle prices lag from the true price, and liquidations stop functioning correctly.

This presents a serious challenge for bringing cross-chain assets and liquidity to DeFi. We mustn’t collateralize these assets with ETH or rely on liquidation mechanisms. If we do, DeFi systems might get access to cross-chain assets and liquidity, but we have just moved the risk of dysfunctional liquidation mechanisms somewhere else; we have not actually solved the problem. Worse, if DeFi then goes on to use these cross-chain assets as collateral themselves, then we are compounding liquidation risks. Worse still, the market cap of cross-chain assets becomes restricted by the market cap and volatility of ETH, which defeats much of the point.

Related: How EOS and ETH DeFi Made It Through Market Turmoil

Instead, DeFi needs cross-chain assets that are collateralized by native tokens whose value is derived only from the use of the assets. This way, the stability and market cap of cross-chain assets is not dependent on anything other than those assets being useful. Such systems do not only survive volatility and market panics, but thrive in them. Decentralized exchanges, which saw historic transaction volume and fee returns during Black Thursday, are an example of this type of system. Despite storing lots of ETH collateral, DEXs remain secure and useful in times of high volatility.

Interoperability solutions must go beyond multisigs and MPC

While both multisigs and multiparty computation mechanisms deserve our praise for bolstering crypto custody, neither are currently sufficient for securing the type of decentralized, always-on network that DeFi is striving toward.

Related: Secure Encryption Key Management Modules, Explained

Multisigs, by virtue of requiring multiple signatures to authorize any transaction, are incapable of scaling or enabling autonomous functions in a large decentralized setting. MPC is preferable and is an important technological breakthrough in securing decentralized networks, but state-of-the-art MPC is vulnerable to going offline when just a few nodes fail, and they have long, heavy pre-compute phases that are incompatible with 24/7 decentralized finance systems.

Therefore, to ensure lively and safe decentralized financial services, DeFi protocols must look to novel types of MPC that do not fail when the underlying participants go offline, do not have heavy pre-compute phases, and can remain stable and functional even in times of high market volatility.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Loong Wang is the chief technology officer and co-founder of Ren, an open protocol that enables the permissionless and private transfer of value between blockchains. Ren's core product, RenVM, brings interoperability to DeFi through a decentralized custody solution that allows the seamless movement of assets between blockchains.

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Analyst reviews Apple stock price target amid challenges

Here’s what could happen to Apple shares next.

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They said it was bound to happen.

It was Jan. 11, 2024 when software giant Microsoft  (MSFT)  briefly passed Apple  (AAPL)  as the most valuable company in the world.

Microsoft's stock closed 0.5% higher, giving it a market valuation of $2.859 trillion. 

It rose as much as 2% during the session and the company was briefly worth $2.903 trillion. Apple closed 0.3% lower, giving the company a market capitalization of $2.886 trillion. 

"It was inevitable that Microsoft would overtake Apple since Microsoft is growing faster and has more to benefit from the generative AI revolution," D.A. Davidson analyst Gil Luria said at the time, according to Reuters.

The two tech titans have jostled for top spot over the years and Microsoft was ahead at last check, with a market cap of $3.085 trillion, compared with Apple's value of $2.684 trillion.

Analysts noted that Apple had been dealing with weakening demand, including for the iPhone, the company’s main source of revenue. 

Demand in China, a major market, has slumped as the country's economy makes a slow recovery from the pandemic and competition from Huawei.

Sales in China of Apple's iPhone fell by 24% in the first six weeks of 2024 compared with a year earlier, according to research firm Counterpoint, as the company contended with stiff competition from a resurgent Huawei "while getting squeezed in the middle on aggressive pricing from the likes of OPPO, vivo and Xiaomi," said senior Analyst Mengmeng Zhang.

“Although the iPhone 15 is a great device, it has no significant upgrades from the previous version, so consumers feel fine holding on to the older-generation iPhones for now," he said.

A man scrolling through Netflix on an Apple iPad Pro. Photo by Phil Barker/Future Publishing via Getty Images.

Future Publishing/Getty Images

Big plans for China

Counterpoint said that the first six weeks of 2023 saw abnormally high numbers with significant unit sales being deferred from December 2022 due to production issues.

Apple is planning to open its eighth store in Shanghai – and its 47th across China – on March 21.

Related: Tech News Now: OpenAI says Musk contract 'never existed', Xiaomi's EV, and more

The company also plans to expand its research centre in Shanghai to support all of its product lines and open a new lab in southern tech hub Shenzhen later this year, according to the South China Morning Post.

Meanwhile, over in Europe, Apple announced changes to comply with the European Union's Digital Markets Act (DMA), which went into effect last week, Reuters reported on March 12.

Beginning this spring, software developers operating in Europe will be able to distribute apps to EU customers directly from their own websites instead of through the App Store.

"To reflect the DMA’s changes, users in the EU can install apps from alternative app marketplaces in iOS 17.4 and later," Apple said on its website, referring to the software platform that runs iPhones and iPads. 

"Users will be able to download an alternative marketplace app from the marketplace developer’s website," the company said.

Apple has also said it will appeal a $2 billion EU antitrust fine for thwarting competition from Spotify  (SPOT)  and other music streaming rivals via restrictions on the App Store.

The company's shares have suffered amid all this upheaval, but some analysts still see good things in Apple's future.

Bank of America Securities confirmed its positive stance on Apple, maintaining a buy rating with a steady price target of $225, according to Investing.com

The firm's analysis highlighted Apple's pricing strategy evolution since the introduction of the first iPhone in 2007, with initial prices set at $499 for the 4GB model and $599 for the 8GB model.

BofA said that Apple has consistently launched new iPhone models, including the Pro/Pro Max versions, to target the premium market. 

Analyst says Apple selloff 'overdone'

Concurrently, prices for previous models are typically reduced by about $100 with each new release. 

This strategy, coupled with installment plans from Apple and carriers, has contributed to the iPhone's installed base reaching a record 1.2 billion in 2023, the firm said.

More Tech Stocks:

Apple has effectively shifted its sales mix toward higher-value units despite experiencing slower unit sales, BofA said.

This trend is expected to persist and could help mitigate potential unit sales weaknesses, particularly in China. 

BofA also noted Apple's dominance in the high-end market, maintaining a market share of over 90% in the $1,000 and above price band for the past three years.

The firm also cited the anticipation of a multi-year iPhone cycle propelled by next-generation AI technology, robust services growth, and the potential for margin expansion.

On Monday, Evercore ISI analysts said they believed that the sell-off in the iPhone maker’s shares may be “overdone.”

The firm said that investors' growing preference for AI-focused stocks like Nvidia  (NVDA)  has led to a reallocation of funds away from Apple. 

In addition, Evercore said concerns over weakening demand in China, where Apple may be losing market share in the smartphone segment, have affected investor sentiment.

And then ongoing regulatory issues continue to have an impact on investor confidence in the world's second-biggest company.

“We think the sell-off is rather overdone, while we suspect there is strong valuation support at current levels to down 10%, there are three distinct drivers that could unlock upside on the stock from here – a) Cap allocation, b) AI inferencing, and c) Risk-off/defensive shift," the firm said in a research note.

Related: Veteran fund manager picks favorite stocks for 2024

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Major typhoid fever surveillance study in sub-Saharan Africa indicates need for the introduction of typhoid conjugate vaccines in endemic countries

There is a high burden of typhoid fever in sub-Saharan African countries, according to a new study published today in The Lancet Global Health. This high…

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There is a high burden of typhoid fever in sub-Saharan African countries, according to a new study published today in The Lancet Global Health. This high burden combined with the threat of typhoid strains resistant to antibiotic treatment calls for stronger prevention strategies, including the use and implementation of typhoid conjugate vaccines (TCVs) in endemic settings along with improvements in access to safe water, sanitation, and hygiene.

Credit: IVI

There is a high burden of typhoid fever in sub-Saharan African countries, according to a new study published today in The Lancet Global Health. This high burden combined with the threat of typhoid strains resistant to antibiotic treatment calls for stronger prevention strategies, including the use and implementation of typhoid conjugate vaccines (TCVs) in endemic settings along with improvements in access to safe water, sanitation, and hygiene.

 

The findings from this 4-year study, the Severe Typhoid in Africa (SETA) program, offers new typhoid fever burden estimates from six countries: Burkina Faso, Democratic Republic of the Congo (DRC), Ethiopia, Ghana, Madagascar, and Nigeria, with four countries recording more than 100 cases for every 100,000 person-years of observation, which is considered a high burden. The highest incidence of typhoid was found in DRC with 315 cases per 100,000 people while children between 2-14 years of age were shown to be at highest risk across all 25 study sites.

 

There are an estimated 12.5 to 16.3 million cases of typhoid every year with 140,000 deaths. However, with generic symptoms such as fever, fatigue, and abdominal pain, and the need for blood culture sampling to make a definitive diagnosis, it is difficult for governments to capture the true burden of typhoid in their countries.

 

“Our goal through SETA was to address these gaps in typhoid disease burden data,” said lead author Dr. Florian Marks, Deputy Director General of the International Vaccine Institute (IVI). “Our estimates indicate that introduction of TCV in endemic settings would go to lengths in protecting communities, especially school-aged children, against this potentially deadly—but preventable—disease.”

 

In addition to disease incidence, this study also showed that the emergence of antimicrobial resistance (AMR) in Salmonella Typhi, the bacteria that causes typhoid fever, has led to more reliance beyond the traditional first line of antibiotic treatment. If left untreated, severe cases of the disease can lead to intestinal perforation and even death. This suggests that prevention through vaccination may play a critical role in not only protecting against typhoid fever but reducing the spread of drug-resistant strains of the bacteria.

 

There are two TCVs prequalified by the World Health Organization (WHO) and available through Gavi, the Vaccine Alliance. In February 2024, IVI and SK bioscience announced that a third TCV, SKYTyphoid™, also achieved WHO PQ, paving the way for public procurement and increasing the global supply.

 

Alongside the SETA disease burden study, IVI has been working with colleagues in three African countries to show the real-world impact of TCV vaccination. These studies include a cluster-randomized trial in Agogo, Ghana and two effectiveness studies following mass vaccination in Kisantu, DRC and Imerintsiatosika, Madagascar.

 

Dr. Birkneh Tilahun Tadesse, Associate Director General at IVI and Head of the Real-World Evidence Department, explains, “Through these vaccine effectiveness studies, we aim to show the full public health value of TCV in settings that are directly impacted by a high burden of typhoid fever.” He adds, “Our final objective of course is to eliminate typhoid or to at least reduce the burden to low incidence levels, and that’s what we are attempting in Fiji with an island-wide vaccination campaign.”

 

As more countries in typhoid endemic countries, namely in sub-Saharan Africa and South Asia, consider TCV in national immunization programs, these data will help inform evidence-based policy decisions around typhoid prevention and control.

 

###

 

About the International Vaccine Institute (IVI)
The International Vaccine Institute (IVI) is a non-profit international organization established in 1997 at the initiative of the United Nations Development Programme with a mission to discover, develop, and deliver safe, effective, and affordable vaccines for global health.

IVI’s current portfolio includes vaccines at all stages of pre-clinical and clinical development for infectious diseases that disproportionately affect low- and middle-income countries, such as cholera, typhoid, chikungunya, shigella, salmonella, schistosomiasis, hepatitis E, HPV, COVID-19, and more. IVI developed the world’s first low-cost oral cholera vaccine, pre-qualified by the World Health Organization (WHO) and developed a new-generation typhoid conjugate vaccine that is recently pre-qualified by WHO.

IVI is headquartered in Seoul, Republic of Korea with a Europe Regional Office in Sweden, a Country Office in Austria, and Collaborating Centers in Ghana, Ethiopia, and Madagascar. 39 countries and the WHO are members of IVI, and the governments of the Republic of Korea, Sweden, India, Finland, and Thailand provide state funding. For more information, please visit https://www.ivi.int.

 

CONTACT

Aerie Em, Global Communications & Advocacy Manager
+82 2 881 1386 | aerie.em@ivi.int


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US Spent More Than Double What It Collected In February, As 2024 Deficit Is Second Highest Ever… And Debt Explodes

US Spent More Than Double What It Collected In February, As 2024 Deficit Is Second Highest Ever… And Debt Explodes

Earlier today, CNBC’s…

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US Spent More Than Double What It Collected In February, As 2024 Deficit Is Second Highest Ever... And Debt Explodes

Earlier today, CNBC's Brian Sullivan took a horse dose of Red Pills when, about six months after our readers, he learned that the US is issuing $1 trillion in debt every 100 days, which prompted him to rage tweet, (or rageX, not sure what the proper term is here) the following:

We’ve added 60% to national debt since 2018. Germany - a country with major economic woes - added ‘just’ 32%.   

Maybe it will never matter.   Maybe MMT is real.   Maybe we just cancel or inflate it out. Maybe career real estate borrowers or career politicians aren’t the answer.

I have no idea.  Only time will tell.   But it’s going to be fascinating to watch it play out.

He is right: it will be fascinating, and the latest budget deficit data simply confirmed that the day of reckoning will come very soon, certainly sooner than the two years that One River's Eric Peters predicted this weekend for the coming "US debt sustainability crisis."

According to the US Treasury, in February, the US collected $271 billion in various tax receipts, and spent $567 billion, more than double what it collected.

The two charts below show the divergence in US tax receipts which have flatlined (on a trailing 6M basis) since the covid pandemic in 2020 (with occasional stimmy-driven surges)...

... and spending which is about 50% higher compared to where it was in 2020.

The end result is that in February, the budget deficit rose to $296.3 billion, up 12.9% from a year prior, and the second highest February deficit on record.

And the punchline: on a cumulative basis, the budget deficit in fiscal 2024 which began on October 1, 2023 is now $828 billion, the second largest cumulative deficit through February on record, surpassed only by the peak covid year of 2021.

But wait there's more: because in a world where the US is spending more than twice what it is collecting, the endgame is clear: debt collapse, and while it won't be tomorrow, or the week after, it is coming... and it's also why the US is now selling $1 trillion in debt every 100 days just to keep operating (and absorbing all those millions of illegal immigrants who will keep voting democrat to preserve the socialist system of the US, so beloved by the Soros clan).

And it gets even worse, because we are now in the ponzi finance stage of the Minsky cycle, with total interest on the debt annualizing well above $1 trillion, and rising every day

... having already surpassed total US defense spending and soon to surpass total health spending and, finally all social security spending, the largest spending category of all, which means that US debt will now rise exponentially higher until the inevitable moment when the US dollar loses its reserve status and it all comes crashing down.

We conclude with another observation by CNBC's Brian Sullivan, who quotes an email by a DC strategist...

.. which lays out the proposed Biden budget as follows:

The budget deficit will growth another $16 TRILLION over next 10 years. Thats *with* the proposed massive tax hikes.

Without them the deficit will grow $19 trillion.

That's why you will hear the "deficit is being reduced by $3 trillion" over the decade.

No family budget or business could exist with this kind of math.

Of course, in the long run, neither can the US... and since neither party will ever cut the spending which everyone by now is so addicted to, the best anyone can do is start planning for the endgame.

Tyler Durden Tue, 03/12/2024 - 18:40

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