This weekend’s crypto crash helped focus the recent cooling off in decentralized finance, once one of the hottest corners of the digital asset world.
While Bitcoin and other rival currencies have mostly stabilized or risen from lows of about 20% seen on Saturday, many DeFi tokens fell further and have been unable to recover since. The DeFi Pulse Index, which tracks tokens like Aave, Balancer, Compound, Sushi, Synthetix, Uniswap, Yearn and Badger, fell as much as 24%.
Join heated discussions with the Moneyweb community and get full access to our market indicators and data tools while supporting quality journalism.
R63/month or R630/year
You can cancel anytime.
The drop adds to the recent poor performance of tokens related to decentralized finance applications, services that allow people to lend, borrow and trade directly, without intermediaries such as banks. The DeFi pulse rate has fallen 62.5% in the last seven months. On the contrary, even after its latest drop, Bitcoin has continued to climb since mid-May.
“DeFi has lost popularity and underperformed other industries for most of the past six months, and that did not change over the weekend,” said Jeff Dorman, chief investment officer for Arca. “What is different is that other tokens bounced much faster, while DeFi remained depressed.”
To be sure, the total value of money invested locked into apps, a measure of usage, has risen 12%, to nearly $ 100 billion, since mid-May, according to tracker DeFi Pulse. The services are aimed in part at the world’s 1.6 billion unbanked people, who do not have access to traditional, centralized financial services. But many investors have moved on to investing in currencies pegged to non-fungible tokens, often digital art, or games.
DeFi has been hit harder in part because many of the tokens have a very small group of holders, said Simon Judd, head of business development at the Index Coop, which manages a Defi index fund.
“A lot of the DeFi tokens have very low liquidity,” Judd said. “So even a little pressure to sell has a huge effect.”
DeFi’s injuries are also partly self-inflicted. BadgerDAO, which allows people to earn interest on Bitcoin, was hacked last week. The exact amount of damage is unclear. One researcher claimed it could amount to $ 120 million. Meanwhile, at Sushi, there are internal struggles between the developers that increase the uncertainty.
Concern over a possible regulatory crackdown is also cooling enthusiasm for DeFi. The Financial Action Task Force, which sets anti-money laundering rules that governments around the world follow, recently called for greater oversight of DeFi apps. While many of them claim to be run by their communities, the FATF said the government could hold developers working on an app liable for failing to perform customer identity checks and enforcing anti-money laundering policies. Today, most DeFi applications allow customers to be anonymous. While it is not a DeFi platform, US state and federal regulators have recently hired companies like BlockFi, saying their savings account-like products violate the laws.
“Non-bank financial intermediaries (NBFIs) can make the financial system more efficient but also more unstable,” said BIS, which acts as the bank of central banks, in its December report released Monday. And that instability also seeps into symbolic valuations.
© 2021 Bloomberg