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Decentralized finance (DeFi) ushered in an explosive quarter in the summer of 2020. The value locked in the DeFi agreement increased from US$2 billion in July to US$11 billion in October. Throughout July and August, multiple DeFi Tokens appreciated by more than 5-10 times. However, since September, despite the continued growth of locked-in value, the DeFi Token price and protocol indicators have clearly diverged, and the Token callback rate has exceeded 50%. This divergence is likely to be due to investors’ decision to lock in profits and become cautious about the high supply inflation of Token, which is still in the early space, and thus turn to low-risk projects.
In total, just last month, the DeFi governance token in Ethereum dropped from $7.5 billion to $5.07 billion, a drop of about one-third. At the same time, stablecoins and tokenized versions of Bitcoin continue to grow in terms of market value.
This contrast means that traders move from governance tokens to assets with less volatility. In addition, the initial surge in DeFi seems to be a precursor to its collapse. Although liquid mining (or yield farming) is not a new phenomenon, Compound’s COMP mining in mid-June was largely regarded as a turning point that ignited the explosive growth of DeFi.
Since then, hundreds of agreements and fork projects have launched their own yield farming plans, becoming the leading method for simultaneously attracting liquidity and distributing governance tokens. Initially, the agreement managed to see both the token price and the liquidity of the supply increase, but as the market began to decline in September, the situation quickly changed. Governance tokens, especially those tokens with high inflation rates that are mined through liquidity, have since adjusted back significantly.
DeFi as of October 19, 2020, a non-exhaustive list of DeFi Tokens with current yield farming plans.
Since September 1, DeFi Token, which has a one-year inflation rate of over 100%, has plummeted by at least 75%. Similarly, Tokens with a low proportion of total supply in circulation also have a stronger decline than Tokens with a high proportion of supply in circulation. Although this is a relatively small sample size, since September 1, the correlation between the one-year inflation rate and price changes is -0.73, indicating a strong reverse relationship between the two. In general, this shows that although liquidity mining can stimulate supply-side demand, it will also cause Token prices to suffer, similar to the depreciation caused by high inflation. The DeFi protocol seems to have realized this, and projects such as Compound and Pickle have reduced their supply.
In addition to the high inflation rate, for those who have been in the encryption field for a long enough time, it may not be surprising that tokens whose prices have risen by 10-20 times will subsequently be corrected by more than 60-80%. This is due to natural market forces and profitability reasons. By comparing the number of addresses profiting at a certain price level, we can estimate that DeFi Token holders have been closing their positions. By using IntoTheBlock’s historical funds in and out, it can be seen that there are fewer and fewer holders of profit at the same price level before the plunge.
At a price of $15,170, the number of YFI holders dropped from 59,700 to only 16,300. This shows that people who make a profit on “paper” are likely to decide to close their positions when prices are higher. Other governance tokens such as SNX, LEND and UMA also show the same pattern. Ultimately, this highlights how investors choose to profit and close their positions after the parabolic rebound of DeFi Token.
For emerging markets such as DeFi, it is normal to experience this type of price fluctuation, especially in the encryption field. Looking ahead, the DeFi Tokens on Ethereum are still insignificant: they currently account for 1.39% of the total cryptocurrency market value of $365 billion. From the perspective of the number of holders, DeFi Token occupies a smaller market share.
Currently, Aave (LEND) holds the highest proportion of ETH addresses, although it has undergone a Token migration process. No DeFi Token can achieve 0.5% of Ethereum. This shows that there are not a large number of holders of DeFi Token within Ethereum, indicating that it is still in the early stages.
Although the price of Token has plummeted, DeFi continues to move forward. As Synthetix and other agreements begin to test lay2 expansion plans, more projects will be developed. Together with this, the progress of Ethereum 2.0 shows that a more powerful decentralized financial service infrastructure is almost ready.
Although DeFi may currently be insignificant compared to the broader crypto market (not to mention the traditional market), it shows its potential for growth. It is undeniable that as the Token price took off during July and August, investors’ expectations were ahead. Since then, DeFi Token has experienced a correction because investors are cautious about high inflation and decided to lock in profits in a greater risk aversion environment. In the final analysis, these unstable price fluctuations are characteristic of a huge potential emerging space. As the market settles, the price hype may fade, but the decentralized financial system will continue to develop.