Opinion:Liquidity mining is dead but DeFi is just beginning

While Bitcoin has hit a new 2020 high and a number of major tokens are warming back up, the price of DeFi tokens has not recovered since projects collapsed in September. Confidence in the DeFi mining tokens has been waning, and there have been some noises that DeFi is dead.

So is DeFi really dead?

Although most of the current liquidity mining projects in the market are facing liquidity depletion, thin business volume, the loss of old users and lack of new users dilemma. Without an effective solution, DeFi may indeed be doomed to die. But for now, it seems premature to say DeFi is dead.

DeFi is not dead yet, at least statistically.

The recent plunge in the DeFi mining tokens has led many investors to lose confidence in the future development of DeFi. Some argue that during the liquidity mining boom, the DeFi bubble was so overvalued that the highs of most tokens are now out and there would be a long period of “value return”; Others argue that this round has shown the market the potential of DeFi, although it is still in its early stages of development, the future is promising.

Neither side seems able to convince the other that DeFi is a newborn child with a bright future or the elder.

What exactly is happening with DeFi now? Maybe we can get a clue from the data.

First, the most intuitive is Ethereum Gas fee.

The chart above shows the average Gas fee per transaction on Ethereum over the past three months, which was as high as $9 at the height of the liquidity mining frenzy and has been falling as the heat waned.

According to BitInfoCharts, the average transaction fee for Ethereum was around $1 in October, a far from September’s peak of $14.583 per Ethereum transaction.

For DeFi players, the intuitive perception of DeFi is that, apart from the high stakes and high returns, it’s more about the congestion of the Ethereum network and the high fees. Today’s drop in Gas fees is largely related to the declining volume of DeFi, which were previously based on the Ethereum network.

Behind the real trading volume is the real market sentiment. Indeed, the market is less bullish on DeFi than it used to be.

Then, we should check the trading volume on Dex.

Source: Defiprime

In September, trading volume on DEX hit a record high of $25.5 billion, with Uniswap accounting for 75 percent of that volume. Thanks to the launch of UNI tokens, UNiswap successfully surpassed Coinbase in September.

However, it did not last long.

According to Dune Analytics, weekly trading in DEX peaked at $8 billion on Aug. 31 and then hit a monthly high of $6 billion on Sept. 14, however, it fell below $3bn as of October 12, the latest data showed.

Speaking at Blockchain Week in Los Angeles, SBF, founder of FTX, noted that DEX’s daily trading volume on Ethereum plummeted in October because liquidity mining no longer provided incentives.

Similarly, Johnson Xu, director of research at Huobi DeFi Labs, has said that the decline in trading volume on decentralized exchanges is due to a number of factors, but one of the main reasons is that people are not making as much money now.

Reduced incentives have led to reduced transactions on decentralized exchanges. It is worth noting, however, that the amount of value locked up in the DeFi smart contracts has not decreased much.

In addition, changes in the number of BTC’s on Ethereum also serve as a barometer of DeFi. As DeFi became popular, people poured money into it in various ways. Mapping BTC is one way to do that.

On Ethereum, the development of DeFi is also positively correlated with the number of anchored BTC. The largest one is WBTC, on DeFiPulse, the number of locked WBTC has reached $1.5 billion, surpassing the Compound and ranking third only to Uniswap and Maker.

Currently, there are nearly 150,000 BTC on Ethereum, accounting for 0.694% of the total BTC and 4.26% of the market value of Ethereum. As you can see from the chart below, the total amount of BTC on Ethereum is still increasing, with the fastest growth occurring at the end of August. Now growth is slowing and there is even a reduction trend in renBTC.

Source: Dune Analytics

The reason for this phenomenon may have something to do with the recent trend of Bitcoin.

Since September, the price of Bitcoin has been gradually rising. In the last two months, the value of bitcoin has risen from about $10,100 to as high as $13,816, up more than 35 percent.

In contrast, the hack of DeFi project Harvest sent FARM tokens plummeting, resulting in heavy losses for miners who mine by mapping bitcoin single token staking.

In other words, to some extent, the return on holding bitcoin is already higher than staking it to liquidity mining. The recent decline in the number of mapped bitcoins is also partly a sign that DeFi mining is not as attractive to users as it used to be.

Finally, let’s check the TVL of DeFi market

In the DeFi market, TVL is the most common indicator used to evaluate the growth of a DeFi project. For a project, TVL in the liquidity pool represents the liquidity of the project. The more value locked, the better the liquidity will be, and the more dynamic the whole project will be; otherwise, the development of the project will be delayed or even die.

Although some investors in the market have expressed objections to the accuracy of using TVL as the project valuation, in general, this indicator still has a certain reference.

In August, TVL of DeFi projects was once linked to the value of tokens, and the rise of token prices tends to be positively correlated with TVL.

Source: DeFipulse

The chart above shows the overall lockup volume in the DeFi market over the past year. We can see an acceleration since the end of June. At that time, COMP came out and ignited the DeFi craze. After that, YFI, YFII and other liquidity mining projects emerge in endlessly way, which attracted a large number of funds.

Although there was a slight pullback in the number of funds locked up in the DeFi market in September and October, overall there is still a lot of money left in DeFi.

It is clear from all the data that DeFi was much hotter in late August and early September than it is now, perhaps because of a liquidity mining hype. It may not be right to say that it all messed up after the recent euphoria, but at least the peak of liquidity mining is over and the Fomo has cooled. The data suggest that it is too early to say that DeFi is dead. It’s just that DeFi, in contrast to its euphoria, is gradually returning to rationality.

Problems to be solved

DeFi, though, is not dead yet. It does not mean it can make a soft landing from mania to rationality. DeFi itself still has a lot of problems to solve.

For example, DeFi tokens have collapsed and there is no sustainable money to enter the market. Previously, the DeFi tokens rose almost across the board in good times, with YFI, YAM, SUSHI, UNI and other tokens all triggering market sentiment. However, the happy time is always short. These tokens are now down 68.92%, 82.24%, 91.01% and 57.93% from their highs, respectively.

Plus, in early September this year, Sushiswap, which nearly emptied Uniswap, crashed and caused falling prices such as Pearl, Pickles. In addition, Gas on Ethereum is expensive, thus the yield of many mining projects is far less profitable, and even some users with a small amount of capital cannot cover the cost from mining revenue, which makes them have to withdraw funds from the liquidity pool.

For projects, after the flee of funds in the liquidity pool, there is neither sustainable capital inflow nor substantial business support, thus a vicious cycle occurs. Farmers gradually know it by heart: mining new projects instead of the old ones. In the end, the liquidity pool would dry up and projects would collapse.

Ironically, the current DeFi market does not seem to be able to create a more innovative play than liquidity mining. Lack of innovative gameplay, the life cycle of new projects is getting shorter and shorter. As mentioned above, a liquidity mining project is not far from being declared dead when the liquidity in its pool dries up.

For now, most of the projects in DeFi are based on the early yield farming methods, implemented by YFI and YAM, even NFT projects such as MEME are the same. In addition, the user will be more cautious about the new projects, when there is a little wrong, they will immediately withdraw funds. As a result, many new projects are collapsing faster and faster. There are even many projects that reach their peaks when they on line and then collapse quickly.

On top of that, the constant hacking is also one of DeFi’s dilemmas.

In the blockchain world, especially in the sector of DeFi, open-source of project smart contracts is very common, so the news of open source projects being attacked by hackers is common too. Therefore, the most worrying point for users in mining is the security of smart contracts, because all the funds are stored in contracts. Once the contract comes under attack, not to mention a sharp drop of token prices, a slight mistake could cost you nothing.

The following chart shows the DeFi projects that have been attacked by hackers since 2020. Several projects, including Uniswap, lost a cumulative $58.8 million to hackers, so it’s no wonder that DeFi is called a hacker ATM.

Source: CryptoDiffer

Among them, bZx, as a project with a good reputation in the early stage, was attacked by hackers three times in one year, and its reputation fell seriously with its TVL ranked low in DeFi projects.

What’s more, recently, Harvest, known as YFI rival product, was also severely weakened by hacker attacks, which directly led to the collapse of token price and the serious decline in TVL. Curve tokens were also affected, CRV plummeted after the Harvest attack.

For now, it seems unlikely that DeFi, once propped up by liquidity mining, will prosper. But the end of liquidity mining does not mean the end of DeFi.

In fact, DeFi emerged as early as 2015, from the early MakerDAO’s first iteration of its architecture to the emergence of Aave in 2017, and then to the formal introduction of DeFi concept on Medium in 2018. DeFi is now more than 5 years old. During these 5 years, DeFi was in relative obscurity but slowly building up its strength. From 2015 to 2019, the DeFi protocol has gone from obscure exploration and become mature in application scenarios, which paves the way for this year’s outbreak.

However, outbreaks are always short-lived. Perhaps DeFi, after the outbreak, will return to a long period of calm. For users, future DeFi, while still profitable, is highly unlikely, at least for the foreseeable future, to replicate the frenzy since June.

Article from Deepchain

Translated by Yang(MengYan Finance)

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To translate some latest policy and issues on blockchain and fintech happened in China

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To translate some latest policy and issues on blockchain and fintech happened in China

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