DeFi Explained: DeFi Tokens with High Inflation Rates
The last 30 days have been an intense journey for DeFi (“Decentralized Finance”) tokens in the cryptocurrency market.
At the beginning of September, most tokens in the category were reaching their ATH (All-Time High) prices for the year, and the market sentiment was moving in an extremely positive direction.
Despite this apparent upswing, the crypto market suddenly took a large downturn on September 2nd (along with stocks). DeFi token values began dropping 10%-20% each day on average, increasing to 30%-50% throughout the following weeks.
This shift communicated a very clear message: it was the end of the short-lived DeFi Bull Run. Many tokens started to recover by mid-September, and there was a sign that the crash may have been a healthy correction.
Still, a group of DeFi tokens fell to the wayside and did not enjoy a swift recovery like their peers, even though they are some of the most-used protocols in the ecosystem.
Why Have Some Tokens Not Recovered?
Upon researching and exploring this phenomenon, we discovered that the tokens have one thing in common: their high inflation rates. The inflation comes from “liquidity mining programs”, which reward protocol users with new tokens that enter the circulating supply on a daily basis and increase the tokens’ sell pressure.
In this article, we will quickly break down these tokens and their current inflation rates that result from their liquidity mining campaigns. You can then draw your own conclusions about their future — if the “bottom” is in for them, or if there are simply not enough buyers to cover the demand in these uncertain market conditions.
Compound (COMP)
Compound is a money market protocol that enables users to deposit their idle assets and earn interest by allowing other users to borrow them.
Compound features a liquidity mining program that rewards 2,312 COMP tokens daily to users of the platform. At the market price of $106 per COMP, that amounts to $245k dollars of sell pressure each day; with the current market cap of $350M, that’s a 25% inflation rate.
Uniswap (UNI)
Uniswap is the largest decentralized AMM (Automated Market Maker) exchange in the DEFI ecosystem. The Uniswap exchange allows for anyone to create a market, provide liquidity, and earn 100% of the trading fees (which are currently 0.3%).
When the Uniswap protocol token UNI was launched, the news was accompanied by a liquidity mining program that rewards “83,333 UNI per pool per day” to 4 predetermined pools on the exchange.
At the market price of $2.75, that’s $900k of sell pressure every day. With the market cap of 500M, that results in a 66% inflation rate.
Curve (CRV)
Curve is a decentralized AMM exchange that focuses on exchanging stablecoin assets. Unlike other AMM exchanges like Uniswap and Balancer that can list any ERC20 token, Curve features admin-only created liquidity pools.
Curve protocol launched the CRV token, which is awarded to all liquidity providers on a daily basis along with a daily release schedule to their early investors and founders.
The total daily emission of CRV tokens is 1,990,196. At the market price of $0.50, that’s $960k dollars of sell pressure every day, and with the current market cap of 38M, that’s a 920% inflation rate.
Curve’s extremely high inflation has to do with the method the token supply was launched. Instead of all tokens being minted and allocated in large parts the supply started at 0 and increases linearly every day.
This includes the supply for early investors, employees, and founders who together receive 821,634 unlocked CRV tokens, about $400k in today’s price, every day along with the distributed rewards.
Conclusion
Now that we know these extreme inflation rates, it’s difficult to predict their bottom. Previously, daily sell pressure of this magnitude was only seen in Layer 1 blockchains — this is a new concept for application-level protocols.
In contrast, there is a silver lining to be found. These tokens are used to govern each platform’s DAO (Decentralized Autonomous Organization), and can actually change the emission rate of liquidity mining rewards. The Compound rewards emission rate was 20% higher before it was changed on August 31st for this very reason.
This begs an important question: will these projects undergo extreme changes now that BUY side liquidity is drying up and the token prices have found no bottom? We must observe the process over time to find out.
