- DeFi keeps making the headlines, but some are saying to exercise caution lest it becomes a bubble
We end the week with Bitcoin markets in the continued sideways trading pattern established weeks ago, with the early week seeing sub USD 9,000 prices before a recovery that saw last month’s high touched before settling now just above USD 9,150.
But the news on a lot of people’s lips now is related more to Ethereum rather than Bitcoin, thanks in a large part to the role of hundreds of decentralized finance (DeFi) apps for whom the majority call Ethereum their home blockchain.
According to fresh data from DeFi Pulse, Ethereum’s segment of DeFi has reached an all-time high of USD 2.15 billion. This total figure is the value in USD of all crypto and assets locked in various protocols. Remarkably, the sector showed a huge rebound after the March crash, recovering in just under three months an exceeding its value just before the crash.
The main contributor? New investors, according to Messari researcher Jack Purdy, who says that all of these profits and seemingly solid business models are extremely appealing to people more used to traditional gains. Purdy said:
“Currently there’s ~$25 million of tokens being distributed every month through yield farming opportunities on DeFi. It’s proven to be an incredibly effective mechanism for building liquidity.”
Things could get even bigger next week when Kyber Network’s “epoch 0” plan goes live. It should allow users to delegate its native Kyber Network Crystal (KNC) token and stake them to the KyberDAO platform, getting ETH profit payouts. So far, investors have staked almost 12 million KNC worth about USD 19 million. Stakers basically gain voting rights on important proposals and parameters, while earning rewards (in ETH) for their efforts, though to be fair, it is likely most investors won’t be voting for anything other than a fatter wallet.
The DeFi talk, of course, hasn’t really been a new one. Mentioned on podcasts as early as mid-2019 as the next big thing to happen, the topic has simply become hotter over the past year as the prospect of being able to autonomously access financial services such as savings, loans and even deposit insurance, is beginning to cause a lot of interest with retail and institutional crypto holders.
But when the entire crypto markets — along with traditional ones of course — crashed in the Black Thursday event in mid March, DeFi projects were among the worst off, with then biggest platform MakerDAO hit by flash crashes. Essentially, people who were lending their crypto on the platform as collateral to earn interest from borrowers, had trusted the smart contracts to guarantee limited losses through automatic liquidation.
But when markets crashed spectacularly, apparently, the platform couldn’t handle it and smart contracts essentially wiped out collaterals of reportedly scores of users, highlighting just how immature the DeFi space was really going to be.
#DeFi is one of the most exciting things going on in the #crypto right now, but the idea that this sector will decouple from the rest of the market is ludicrous. Eventually, the mania will end, and DeFi will trade in line with the rest of the market.
— Weiss Crypto Ratings (@WeissCrypto) June 24, 2020
Weiss Crypto Ratings recently said of the industry that “eventually, the mania will end, and DeFi will trade in line with the rest of the market”, although that has not stopped others from warning that the current players could be overvalued, leading to much-dreaded talk of “next crypto bubble” being whispered around.
One such example was when someone spotted that the governance token of DeFi loan portal Compound had surged almost 300% in value in just a week after it launched, before shortly falling. Peaking at USD 372 in June, it then went down by over 55%, before recovering right now to about USD 185.
The thing that seems to have called the most attention to the DeFi sphere in recent times is the surge in value of governance tokens of certain DeFi platforms–in particular, COMP, the governance token of decentralized loan platform Compound, which jumped nearly 300% in value within a week of its launch.
Twitter observer ThetaSeek said this was a demonstration of the wanton overvaluation that DeFi projects were guilty of, since value versus assets under management (AUM) were typically less than a third at most. They have an example of Goldman Sachs, valued at 2% of AUM, while BlockFi, another DeFi firm, was valued at 30% of AUM.
Law firm Frost Brown Todd’s John Wagster noted how Compound’s rise has somewhat destabilized other parts of the sector, and went as far as to say that the real value of COMP was only USD 50. He explained:
“Since the Compound protocol currently rewards markets that lend dollars more than other tokens, the demand on dollar-denominated stablecoins, such as DAI, is making it difficult for those coins to hold their dollar peg.”
In short, DeFi is a good thing, but we should be cautious about guaranteed success always and be prudent with our investments. Always put in what you can afford to lose!
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