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Decentralized exchanges have existed for a while, but its importance did not become apparent until the decentralized financial mania took over. The use of DEX has grown exponentially. Compared with previous months, the transaction volume in August and September has almost doubled.
But, can the transaction volume tell everything? In the DeFi mania, the biggest winners are some DeFi governance tokens. In June, Compound launched the COMP token, and other projects followed a similar pattern. Yam Finance’s YAM, SushSwap’s SUSHI, and BurgerSwap’s BURGER were all very popular at the time of their launch, but after the initial hype stopped, their prices began to fall.
Based on current data, we can relatively easily trace the direct correlation between the rapid growth of DEX trading volume and the enthusiasm for issuing governance tokens, and so far, these tokens have not been able to maintain their value after the initial hype.
The continuation of the IPO boom?
Cryptocurrency has always borrowed terms and concepts from traditional finance. The idea of initial coin offering (ICO) originated from initial public offering (IPO). However, although the IPO shows that investors are confident in the future of a company, anyone can participate in an ICO, and anyone can issue tokens regardless of the need to generate value.
With DeFi tokens, there is an already created product that can provide some value to market participants. DeFi’s governance tokens provide holders with shares in future product development. In this case, compared with ICO tokens, DeFi tokens are more similar to the concept of IPO.
However, according to the findings of the financial services company UBS (UBS), after the IPO lock-up period ends, most investors will dump their stocks on the secondary market. This trend does not bode well for anyone holding DeFi tokens in the early days, as they usually hoard DeFi tokens. Of course, DeFi is still in its infancy, so it is too early to make any specific comparisons. The token COMP that started all of this has only been launched for three months. Omri Ross, chief blockchain scientist at the trading platform eToro, believes that holding DeFi tokens should still be cautious:
“The fundamentals of the valuation of DeFi governance tokens are still inconclusive. Considering the novelty of the DeFi field and the many complex factors that need to be considered when evaluating the basic value of tokens, the pricing of governance tokens is still highly speculative.”
Does DeFi token lack correlation with BTC?
DeFi tokens may show a weird relationship with the IPO, but DeFi tokens and the trend of the cryptocurrency market are contrary. With a few exceptions, most cryptocurrencies tend to follow the price trend of Bitcoin (BTC). Currently, DeFi tokens are an anomaly in this regard. Although Bitcoin has been fluctuating within a relatively narrow range in the past month or so, the price trend of DeFi tokens has nothing to do with the Bitcoin market. Curis Wang, co-founder and CEO of Bitrue, told Cointelegraph:
“I don’t think the price of DeFi tokens will rise with the rise of Bitcoin. Most users and investors of these DeFi tokens are usually very knowledgeable about DeFi, cryptocurrency and finance, and they understand the effects of these projects. Far beyond Bitcoin’s goal.”
All of these raise some interesting questions about the future direction of the DeFi token market. The concept of IPO has been going on for decades. Investors still have enough enthusiasm to apply for the initial allocation of stocks, even if the data indicates that they may lose money. However, in some cases, stock investors can hold positions for decades. For example, Berkshire Hathaway has held shares in Coca-Cola and Wells Fargo for more than 30 years.
In the fickle field of crypto investment, some people think that it seems difficult for investors to hold DeFi tokens for a long time, especially when their value continues to decline. In addition, there is also a question whether the law of diminishing returns will work, which means that the value of each new DeFi token that enters the market will gradually be lower than its previous token.
In a market segment that seems to be driven by hype, this seems more than a possibility. If this happens, DeFi tokens may start to behave like long-launched altcoins. This will allow them to quickly gain a place in the token rankings, thereby more accurately reflecting their long-term value and more closely following Bitcoin’s price fluctuations.
Faintly visible ghost
All these speculations fail to take into account one factor that may stifle investor interest in DeFi tokens: regulation. Although DeFi is committed to decentralization, few projects can be truly decentralized. These projects have teams that maintain the underlying code base, pay for hosting application data, and are responsible for maintaining the user interface.
If the time comes, all the DeFi tokens in the world will not be able to prevent the US Securities and Exchange Commission (SEC) or the Financial Crime Enforcement Network from tracing anyone they believe violates US regulations. However, Curis Wang still believes that the time has not yet arrived, and some institutions will not issue regulatory regulations in the short to medium term:
“First of all, Bitcoin has existed for ten years and received widespread public attention at the end of 2018. However, by 2020, there are still almost no clear regulations on regulation. Secondly, the focus of DeFi is its decentralization. When the project is open source, even if you somehow prevent a team from working on the agreement, you cannot prevent others from forking or building on the agreement.”
The recent allegations against BitMEX have highlighted that if crypto companies and platforms (including DeFi) are found to lack KYC and AML checks, they may face potential dangers. In addition, CipherTrace also pointed out that DeFi can provide an attractive safe haven for money launderers.
The fact that the funds stolen by KuCoin exchange hackers have flowed out through Uniswap recently further proves this view. If the worst happens, DeFi may repeat the mistakes of ICO, resulting in DeFi governance tokens worthless. EToro’s Ross believes that this issue will eventually slow the current DeFi craze: “As the application of blockchain technology is increasingly adopted in a wide range of user communities, DeFi products may face regulatory scrutiny.” He added Road:
“Because the DeFi field will attract more funding, attention and supervision, I think this is beneficial to the DeFi field, and it may also need future agreements to integrate some KYC and AML building blocks.”
But at least for now, DeFi tokens have allowed liquidity miners to reap great returns. More importantly, although the price of DeFi tokens is currently declining, the craze shows no signs of abating immediately. However, for those who have survived long enough in the crypto field, it is best to keep in mind the long cold winter brought to the crypto market after the ICO mania, and it is best to stay vigilant and not let history repeat itself.