DeFi token YFI, AAVE and COMP drop over 10% within a day as the market pulls back on Bitcoin and Ether uncertainty.
Major decentralized finance (DeFi) tokens Yearn.finance (YFI), AAVE and Compound (COMP) plunged steeply in the last 24 hours. The three DeFi tokens, which are valued well over $500 million, declined by over 10% on the day.
Three reasons why DeFi-related cryptocurrencies pulled back particularly hard are low volume, the declining Ether (ETH) price, and the uncertainty around Bitcoin (BTC).
Even top DeFi tokens like YFI and AAVE have comparably low volume
Compared to major cryptocurrencies, like Bitcoin and Ether, DeFi tokens have relatively low volume. This means that when Bitcoin corrects, tokens with lower volume are at risk of larger pullbacks.
However, short-term investors might have felt compelled to sell DeFi tokens when Bitcoin and Ether dropped nearly 10% within two days.
The timing of the Bitcoin price drop matched with the DeFi market’s correction on Dec. 11. As the BTC price started to decline from $18,400, leading DeFi tokens also began to correct.
YFI, for instance, the governance token of the Yearn.finance DeFi protocol, dropped 12% in the past 12 hours. In the same period, the Bitcoin price recorded a 4.6% drop.
The strong correction of DeFi assets comes as a surprise because of their recent momentum. As an example, BtcEX reported that COMP rallied 56% in one week as the amount of capital locked in the Compound protocol spiked.
Ethereum’s momentum slows
Although the impact of the Ether price on the DeFi market differs from protocol to protocol, Ether’s value has a major effect on the overall DeFi market.
Most DeFi protocols revolve around investors lending and borrowing capital with Ether as collateral. Hence, when the price of Ether drops steeply, the total value locked (TVL) in DeFi would naturally fall.
According to data from Defipulse.com, the TVL across DeFi protocols declined from $15.16 billion to $13.97 billion in the past four days. The sharp drop in TVL coincides with the moment DeFi assets corrected.
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