Another Bubble in the Making? The Case of Flashy DeFi with Fancy Interest Rates

After the success of COMP tokens, DeFi space is enjoying explosive growth but experts warn about the sustainability of it all.

DeFi space has been seeing explosive growth for the past few weeks. The total market cap of DeFi has reached $6.2 billion, as per DeFiMarketCap. Also, the total amount locked in DeFi has hit a new all-time high at $1.50 billion, according to DeFi Pulse.

This surge was the result of people jumping into DeFi tokens after COMP prices shot up over the announcement of its listing on Coinbase Pro, just a couple of days after the initial distribution of Compound Finance’s governance token COMP.

These tokens give the taken holders governance rights to the changes on the Compound platform. They can be delegated but, as of now, gives the holders no financial claim to any of the revenues generated by the project.

Every day 2,880 COMP tokens are distributed in each market 50/50 to both borrowers and lenders. 91% of these tokens are currently going to USDT suppliers and borrowers, said Nick Martitsch, Business Development at Compound. Tether (USDT) has “surpassed ETH to become the largest market on Compound.”

Currently, there is $120 million of outstanding USDT borrowed; this growth has resulted in a downward trend of “COMP earned per $1 borrowed.” The supply and borrow rates for USDT are 12% and 17%, respectively.

Liquidity miners, meanwhile, are compensated for both lending and borrowing. Which means, “the optimal strategy is to lend the highest interest rate asset, borrow as much as you can against your cAsset tokens (a claim on-lent assets) and then add the remaining assets back into the lending pool,” explained Nelson Ryan, Senior Associate at eblockventures.

Annualized returns are impressive at over 100%, but the interest rate is even higher on non-stablecoin assets, which caused the price of these assets to rise as people buy them to supply and then borrow against them, he said.

These yields are predicated on the market cap of COMP, whose only 25% supply is circulating in the market currently with “no borrow market to short the spot COMP market and 2880 new COMP hitting the market every day for the next four years.”

While COMP prices may have risen exponentially to $240 at the time of writing, COMP September futures on FTX is much lower at around $185.

It’s Just temporary arbitrage, or there are unstated risks

Besides the increase in DeFi tokens prices, last week, a new project, ‘BTC Yield Farming Pool’, was introduced by Ren, Synthetic, and Curve Finance together.

“The defi hunt for yield is nearing an interesting inflection point,” said Ari Paul of BlockTower adding that the incentives offered by DeFi projects are “too good to be true in that the high yields are ultimately coming from a future intrinsic value of tokens which can at most be worth the value that can be extracted as rent from future borrowers and lenders.”

Qiao Wang also chimed in with “if you are making a fuck load of money right now farming DeFi yields, be thankful for the poor souls who just got liquidated by Arthur.”

According to Ari Paul, DeFi may be a “classic bubble fueled by liquidity mining,” which would unwind when maybe the system maxes out on leverage, chasers reverse course fast after stake mounts and yield average start falling, or maybe a bug or a game theory attack at a moment of vulnerability. He said,

“As the tokens start falling in value, that virtuous cycle of increasing locked up capital becomes a vicious cycle of falling token price -> falling yield -> less staked assets -> lower intrinsic token value -> lower token price.”

Amidst this growing frenzy, even Ethereum co-founder sounded caution,

“I think we emphasize flashy DeFi things that give you fancy high-interest rates way too much. Interest rates significantly higher than what you can get in traditional finance are inherently either temporary arbitrage opportunities or come with unstated risks attached.”

Instead of optimizing yield, it should be improving the core building blocks like oracles, DEXes, privacy, stablecoins, and synthetic tokens for fiat, he said.

Get Free Email Updates!

*Action* Enter Best Email to Get Trending Crypto News & Bitcoin Market Updates

I will never give away, trade or sell your email address. You can unsubscribe at any time.

AnTy
AnTy
AnTy has been involved in the crypto space full-time for over two years now. Before her blockchain beginnings, she worked with the NGO, Doctor Without Borders as a fundraiser and since then exploring, reading, and creating for different industry segments.

[Alert] Use the author's self-conducted information at your own risk, do you own research, never invest more than you are willing to lose.

[Disclosure] The published news and content on BitcoinExchangeGuide should never be used or taken as financial investment advice. Understand trading cryptocurrencies is a very high-risk activity which can result in significant losses. Editorial Policy \\ Investment Disclaimer

LEAVE A REPLY

Please enter your comment!
Please enter your name here

3,470FansLike
2,795FollowersFollow
4,233FollowersFollow

Live Bitcoin Price & Latest BTC Charts

Today's Latest Crypto News

Second Half of 3-Yr Bull Market: Ether’s Crazy Run has 90% of its Supply in Profit

This past weekend, the price of Ether went past $400 to as high as about $420, a level last seen in July 2018. This...

Teenage Mastermind Behind the Twitter Hack Owns $3.39 Million in Bitcoin (300 BTC); Bail Set At $725k

The 17-year old Twitter-hack mastermind holds over $3 million in BTC value with only $725,000 set for bail. In a bizarre moment last month, Twitter...

Bitcoin (BTC) Jumped to $100,000 on Binance Futures

There have been several predictions that see Bitcoin hitting a six-digit figure. On Sunday, this became a reality, very briefly, thanks to an algorithm. Bitcoin...

Flash Crash Caused Serious Network Congestion for ETH, ETC, And ERC 20 Tokens on Coinbase

On August 1, the Ethereum's blockchain faced a spike in network transaction fees, causing a backlog in transfers across several exchanges. Coinbase and Binance,...

Bitcoin’s Wild Weekend Reminiscent of 2017 Bull Rally, ‘Higher Highs Ahead in 2020'

This past weekend, bitcoin had a rough time as the largest cryptocurrency made its way past $12,000 to $12,112 in trading just after midnight...

BitcoinExchangeGuide is a hyper-active daily crypto news portal with care in cultivating the cryptocurrency culture with community contributors who help rewrite the bold future of blockchain finance. Subscribe on Google News, see the mission, authors, editorial links policy, investment disclaimer, privacy policy. Got News? Contact us, we are human too. Note: nothing here is financial advice, do your own research thoroughly.

Start Using Crypto Today