DeFi Shifts to A Risk-off Environment, But A 2017-like Crypto Rally is Still Far Off
During the recent Bitcoin rally, altcoins suffered losses, and DeFi tokens had an even worse time.
Today, as BTC went to the $13,000 level, driven by European lockdowns, the crypto market reported deeper red. This consolidation in BTC could give altcoins a chance to recover, but it’s undecided and remains to be seen.
In the past month, except for a handful of DeFi tokens like Aave and Maker, the majority of them extended their losses from last month.
The total value locked (TVL) in the decentralized finance (DeFI) sector has been unperturbed by the crash in price as it hit an all-time high at $12.46 billion on Oct. 25. But since then, it has dropped nearly 10% to about $11.2 billion, as per DeFi Pulse.
But such declines aren’t new for the TVL, and it tends to recover just as fast.
“Just want to say that we are still extremely early in DeFi. As an analogy to Bitcoin, we probably just experienced the spring 2013 hype cycle. We haven't even seen the winter 2013 cycle yet. Let alone the 2017 cycle,” said entrepreneur and quant trader Qiao Wang.
According to him, in the DeFi hype cycle, we are currently at a point where half of the legit projects have capitulated while the other half are in the process of capitulating.
Ethereum, on which the whole ecosystem is built, price-wise, is trading around $385. The sector meanwhile has a record 9 million ETH locked in it.
DeFi tokens on Ethereum are still minuscule, though, as they currently account for 1.39% of the $365 billion total crypto market cap. In terms of a number of holders, they capture an even smaller share of the market.
#DeFi tokens have been struggling to recover since the September crash
The ratio of DeFi tokens’ market cap to #Ethereum went from being around 25% in late August to just over 15%.
ETH has also dropped, meaning that DeFi tokens have fared relatively worse in that period pic.twitter.com/ZDCtAreKh9
— intotheblock (@intotheblock) October 28, 2020
DeFi governance tokens in Ethereum have declined by a third in just last month while stablecoins and tokenized versions of Bitcoin on Ethereum have managed to continue in terms of market cap.
The shift has been because of a shift to a risk-off environment into less volatile yield-generating assets. As such, yield farming is transitioning from attracting users with unsustainably high rewards “to a more methodical approach rewarding those that actually create value to DeFi protocols.”
“It appears that the catalyst for DeFi’s initial boost may also be behind its crash,” noted IntoTheBlock.
Besides the high inflation rates, the bigger the rise in the price of DeFi tokens, the larger the retrace.
“While DeFi may currently be negligible in comparison to the $1.5 trillion financial services industry, there is a high room for growth as these systems become scalable and adopted.”