Terra Accumulates CVX, Liquidity Running Dry, Intro to Zeta Markets

APR 18, 2022 • 6 Min Read

Joo Kian + 4 others

DISCLOSURE: DELPHI VENTURES HAS INVESTED IN BTC, ETH AND LUNA. MEMBERS OF OUR TEAM ALSO HOLD CVX. THESE STATEMENTS ARE INTENDED TO DISCLOSE ANY CONFLICT OF INTEREST AND SHOULD NOT BE MISCONSTRUED AS A RECOMMENDATION TO PURCHASE ANY TOKEN. THIS CONTENT IS FOR INFORMATIONAL PURPOSES ONLY AND YOU SHOULD NOT MAKE DECISIONS BASED SOLELY ON IT. THIS IS NOT INVESTMENT ADVICE.

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Chart of The Day: Terra Leads CVX Accumulation

  • Convex is a yield optimization platform that allows depositors to receive boosted Curve yields without locking up CRV at the cost of a fee. To make up for this fee, CVX is given out as LP rewards.
  • Terra has been a huge accumulator of CVX, growing to be the largest CVX held by a DAO in 4 months. Over the past 30 days, they have accumulated around 649k of CVX, pushing them ahead of Frax Finance to be the largest DAO holders of CVX. This comes as Terra has been using the 250M UST from the community fund to farm and stack CVX and CRV. This allows Terra to build up their own treasury of CVX and CRV to direct incentives towards their own pools and may allow them to taper Votium bribe spending.
  • Furthermore, the creation of a new 4pool, consisting of UST-FRAX-USDT-USDC, will allow Terra and Frax to direct incentives towards the new 4pool. With Terra and Frax owning a significant sum of CVX, it is likely that they will direct significant incentives and create deep liquidity within the 4pool. The 4pool alliance also consists of Badger, Redacted, Olympus and Tokemak, which adds up to around 60% of all DAO-owned CVX that will be supporting the 4pool.
  • The 4pool will drive up demand for both UST and Frax, and might also end the Curve/Convex wars as smaller protocols will find it tough to fight for rewards. This will also further strengthen the peg of UST and Frax.
  • KP3R hasn’t given up just yet as they accumulated 530k CVX in the past 30D to incentivize their non-USD stablecoin pairs on Convex.
  • To learn more about Convex, read our Delphi Pro report here.

Where’d The Liquidity Go?

[Excerpt from Apr. 14th Market Insights]

The Dollar That Just Won’t Quit

  • We’ve been warning that USD strength is one of the biggest headwinds for markets, including BTC and crypto. As BTC struggles to keep its head above $40K, the US Dollar Index (DXY) just broke 100 for the first time in almost two years. The greenback is now on the verge of a multi-decade breakout as two of its major currency pairs (EUR and JPY) are both vulnerable of technical breakdowns of their own. The EUR and JPY make up ~70% of the DXY Index.
  • The DXY is up ~12% since May, marking its best stretch since its run up in late 2014 – early 2015. The dollar’s latest rally pushed the DXY’s 14-week RSI above 70 after seeing positive gains in 10 of the last 11 trading days.

Liquidity Running Dry

  • Over the last several weeks, the discussion has started to shift to the topics of liquidity and volume conditions within markets. What exactly is liquidity? The textbook definition is the ability to convert an asset or security into cash with minimal costs. In reality, market liquidity is really driven by demand.
  • Demand is the ability and willingness of market participants to purchase goods, assets, and services. The more credit that exists in the system, the more potential aggregate demand there is. This relationship between credit and demand (and ultimately liquidity) helps push asset markets higher over time. The same is true in reverse conditions.
  • The supply of credit is far more elastic than hard currency. When the economy is growing and times are good, credit tends to expand. When a recession hits, credit conditions tend to deteriorate. One of the primary determinants of consumer demand, for example, is the tightening or easing of credit conditions within the economy. The reflexivity of credit (and leverage) makes it an important factor for demand and, ultimately, liquidity conditions.
  • The next logical question is what determines the amount of credit or liquidity in the system. Michael Howell of CrossBorder Capital defines liquidity as a measure of balance sheet capacity within the financial system. In today’s world, liquidity is determined by the financial system’s ability to service new, but more importantly existing, debt obligations. Interest rates are an important variable as they influence the cost of credit, as are things like asset prices and banks’ willingness to extend credit to qualified borrowers. Interest rates are determined by both central banks (via monetary policy) and public market forces.
  • When it comes to markets, liquidity is a bit of a fickle concept in and of itself. Oftentimes, the moment you need liquidity most is the moment it tends to disappear.

  • Signs of liquidity deterioration can also be observed within BTC spot markets. This can be seen when looking at the relationship between the average BTC size order resulting in 10bps of slippage. Slippage is the difference between the expected price of a trade and the price at which the trade is executed.
  • In very simple terms, the more liquid a market, the larger a position size can be before incurring slippage. Over the last several weeks, we can see a decrease across most exchanges in the average size BTC order incurring 10bps of slippage. This could be a warning sign for spot market liquidity should this trend persist.
  • It is also important to note that derivate markets are becoming increasingly more important in terms of market structure, notional volume, price discovery, etc. While these are completely valid points, it is also good to remember that a healthy market must be supported by both spot and derivative markets if it is to be sustainably healthy.
  • For more, Delphi members can see the latest Market Insights here.

Zeta Markets: The Premier Under-Collateralized DeFi Options and Futures Trading Platform Built on Solana

[Excerpt from a Delphi Podcast]

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Joo Kian + 4 others