DeFi FOMO is Strong But What’s to Come Once This Craze is Over?
The DeFi space has been picking up heat for some time now as the tokens gained a lot of interest after their prices skyrocketed.
In 2020 so far, some of the DeFi coins like Aave have jumped 3,185%, Kyber Network 898%, Bancor 498%, Loopring 493%, REN 445%, Synthetic 235%, 0x 112%, and Augur 101%.
In the past year, projects like Aave and Kyber Network have also gained 7,000% and 1,000% against BTC.
In the past few weeks, especially after Compound’s stellar performance following the listing of its governance tokens just days after launch on Coinbase, which is also backing the project, took the DeFi space by storm.
However, ConsesnSys’s latest report states, “the increased activity caused by the activity around COMP has come from those already inside the ecosystem.”
Also, “although COMP has caused massive waves in the DeFi community and greatly impacted ETH locked and DAU, it has not brought many new users into the ecosystem.”
According to a new report by Consensys, the number of “DeFi” users with at least 100 “DeFi” transactions within 3 months, is in the low 1000s.
This is what crypto twitter is raving about. Why? Because everyone invested in these projects but no one uses them.
— Udi Wertheimer (@udiWertheimer) July 16, 2020
Many also argue that Defi’s gains are just recycled money, flowing from large-cap cryptos to these latest hot DeFi tokens, and no new money is entering into the sector.
A Long Journey Ahead for DeFi
“Real talk. There's so much Defi FOMO but few talk about the elephant in the room: scalability,” said crypto analyst Qiao Wang. According to him, “latency and throughput are the biggest hurdles to Defi adoption,” and it will be a long journey for Defi.
“Most people seem to think that we'll see exponential growth in the next few months/years. More likely than not, I think we'll see step-function growth. Grow -> hit latency/throughput ceiling -> infra breakthroughs -> grow again,” Wang said.
Recently, DeFi’s biggest lending protocol Compound was integrated with Curve, a crypto custodian that services institutional investors while Aave, which has “become a DeFi VC darling” with the sale of $3M worth of LEND tokens to crypto funds Three Arrows Capital and Framework Ventures. Aave is dominating the long-tail lending market, with its AUM heavily weighted towards mid-cap digital assets.
“Aave is taking the Binance strategy to scaling while Compound seems to be taking the Coinbase strategy,” said Spartan Black, of crypto hedge fund The Spartan Group.
What Once the Craze is Over
It’s not only the price of Defi tokens that has captured people’s interest. The interest rates offered are just as lucrative, some offering higher than 10% yield on some digital assets.
But Ethereum co-founder Vitalik Buterin said, “these interest rates do not reflect on anything that is remotely sustainable. It’s just a temporary promotion that was created by printing a bunch of compound tokens, and you can’t just keep printing compound tokens forever.”
According to him, once this craze is over, DeFi will no longer offer double digits interest rates but eventually come down on par with those offered in the traditional financial system.
While Buterin thinks synthetic assets would improve the space, Litecoin creator Charlie Lee isn’t “too excited” or optimistic about the future of DeFi.