With 600K ETH Leaving The Protocols, Is The DeFi Trend Over?
DeFi peaked on 20 October, with over 9.2 million Ethereum locked inside DeFi protocols such as Yearn.Finance (YFI), Compound (COMP) and Uniswap (UNI). Since then, the attractiveness of yield farming seems to have been steadily declining, with investors pulling over 642,000 ETH out of these protocols. Leaving many people wondering, is the DeFi trend over?
Downtrend Marked By Exit Scams, Protocol Issues, Hacks And Mistakes
With the gradual slowdown of the DeFi craze, it seems like the cat’s out of the bag for some of the shady operations behind the DeFi protocols. With many projects using a fully anonymous approach to hosting DeFi protocols and applications, and countless clones with unknown operators behind them, many retail investors have been burnt by malicious actors that are preying on their naivety — and lack of technical skills — resulting in thousands of lost, stolen or permanently inaccessible tokens.
Of course, not every DeFi project is an exit scam. But even legitimate ones face trouble when the community seeks profit without reason — as learnt by Andre Cronje, founder of YFI, when his yet to be launched gaming DeFi project, “Eminence”, resulted in the loss of over $15 million dollars. In this incident, overzealous investors decided it was a good idea to put their Ethereum inside one of his work-in-progress smart contracts, and the untested contract was quickly siphoned of almost all of its funds.
Meme coins are just one example of the problem. Most new DeFi projects don’t come with any spectacular new ideas — new tokens are often forked, or copied, from an existing DeFi project with slight tweaks (and sometimes, administrative backdoors that allow for funds to be withdrawn by the creator), and released with little to no testing, potentially resulting in catastrophe. YAM, one such coin based on Ampleforth’s unique “rebase” mechanism, found itself in a nightmare situation when its treasury ballooned with too many tokens — causing YAM holders to lose control of governance and the price of the token to fall drastically overnight.
SushiSwap, another meme-like project forked from UniSwap’s code, created trouble across the community when the anonymous founder — only known as “Chef Nomi” — unexpectedly sold his share of project tokens for over $13 million. The token, which was listed and supported by large scale projects such as Binance, immediately fell 73% in price within just 18 hours — with accusations that Chef Nomi’s actions constituted an exit scam. He eventually returned the profits back to the developer fund, helping it to recover some of its value.
Wine Swap, another exit scam that happened on Binance’s native blockchain (Binance Smart Chain), found itself exit-scamming with over $345,000 in customer funds in less than an hour after its launch. Binance managed to freeze the scammer’s funds with the help of two other exchanges, before working out the identity of the scammer and successfully recovering 99% of funds from the perpetrator. Sadly, not every exit scam has a good ending — YFI clone yfdexf.Finance took off with over $20 million in September.
Withdrawal May Be Related To The Release Of ETH 2.0 Deposit Contract
It’s possible that the DeFi madness is in part dwindling due to the release of the ETH 2.0 deposit contract; investors in DeFi, often termed “yield farmers”, are looking closely at the potential profits behind staking Ethereum 2.0, the upgrade for the Ethereum blockchain. With the deposit contract launch mechanism that preemptively allows users to prepare for staking ETH 2.0 available to them, users have to ready themselves ahead of time for the transition by locking up 32 ETH for each node they wish to run on the new blockchain.
Unfortunately for DeFi, any Ethereum that moves into staking the new ETH 2.0 network will be locked and not eligible to be used in any other way while it is staking the network. Returns are likely to be between as high as 20% and as low as 2% depending on the total amount of ETH being staked across the entire network, making it an attractive alternative to the much lower yields that DeFi is currently offering (between 1% to 9%).
The issue of compatibility comes to play as well. Unlike Ethereum 1.0, the Ethereum 2.0 blockchain will not be supporting smart contracts initially — which is currently planned for a 2021 or 2022 release. This means that DeFi projects will have to continue being hosted on the Ethereum 1.0 chain. This does not mean that Ethereum cannot be sent between the two chains — simply that users who are relying upon the faster speed and efficacy of ETH 2.0 will not be able to concurrently work with the profit generation of DeFi built on Ethereum 1.0.
Is the DeFi Trend Over? Prices Do Not Seem Too Affected
Ethereum’s prices stay strong in the wake of ETH 2.0’s impending launch, and Bitcoin’s powerful upward rally — one ETH is currently hovering at a steady $440, which is significantly higher than even at the peak of DeFi’s dominance. It’s likely that the Ethereum and Bitcoin rally will mark the start of the bull market for cryptocurrencies, which has almost always followed common market cycle behaviour — except exaggerated by a time scale almost 10x faster than typical stock markets. So, is the DeFi trend over? It appears that the downward spiral as 600k ETH withdrawn from DeFi protocols hasn’t made too much of a dent in the prices. The same cannot be said for its reputation.
Catch up on the latest DeFi offerings and other cryptocurrency happenings with Oobit. Oobit is a financial service that makes buying and selling digital currency easy, simple and lets you use crypto with the same ease as traditional money. We connect and introduce what would be an endless maze of information surrounding blockchains, and build tools that enhance the crypto user experience.
