Redefining DeFi: DeFi tokens have fallen sharply, and technological progress may support the next rally
Editor's Note: This article comes fromCointelegraph Chinese (ID: CointelegraphChina)Editor's Note: This article comes from
Cointelegraph Chinese (ID: CointelegraphChina)
Cointelegraph Chinese (ID: CointelegraphChina)
, Author: SHEVCHENKO, reprinted by Odaily with authorization.
You can feel something different now. It used to be that every weekend we would discover some new exotic treat, or someone would launch a vampiric attack on another protocol, cleverly disguised as a Ponzi scheme.
Not that nothing happened this week, it's just that the horizons feel different this time around.
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DeFi Pulse Index down over 20% in a week
Compound’s COMP fell below its August low of $127 to touch $100. Now, YearnFinance’s YFI is down 66% from its all-time high. SushiSwap’s token has entered a death spiral: After peaking in September and falling nearly 90%, it’s down another 50% since the last news. The Uniswap token fell below the $3 psychological barrier.
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One hope is that the total value locked (TVL) in DeFi remains high at $10 billion, which some analysts say is a sign of solid fundamentals.
I disagree with this. I've written at length that with the advent of liquidity mining, TVL really doesn't represent anything.
The reason why Uniswap, Compound, SushiSwap, Curve, etc. have a high total value locked is that new tokens are continuously issued to incentivize them. Protocols like Maker or Aave also get a second windfall from DAI demand or token price increases.
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The problem of double counting also becomes very apparent. For example, WBTC is valued at $1 billion in the DeFi Pulse ranking. Over 83% of the supply comes from other projects, notably Uniswap, Maker, and Curve.
A major source of double counting is DAI — the collateral used to create it is designated Maker TVL, which is then counted when it enters Uniswap or Compound. In the case of DAI, one could argue that the collateral and the stablecoin themselves serve different purposes, so it makes sense to consider both. But WBTC is just a token, it will not do anything by itself, just like calculating the Ethereum supply as TVL in DeFi.
Regardless, I don't think the community has realized what's going on. We saw Ethereum network congestion and DeFi peaking in terms of users and activity. It's been a great journey, full of dubious stuff and outright success (for example, I'm amazed at the liquidity and volume on the decentralized exchange Uniswap).
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Over the past few months, the average gas fee has been ridiculously high. Source: Etherscan
Instead, all we get are blockchain congestion and valuation metrics that reflect circular dependencies and poor accounting. Unfortunately, when the market rallies too much, they can also become very unhappy when they realize that the fundamentals behind the rally are insufficient.
So the point is, I don't think the market is really done selling off. I don't have a grasp on predicting the future, I could be wrong, but I've been in crypto long enough to know that until everyone starts talking about technology and the challenges ahead, while criticizing an overly bullish bull market, we haven't hit bottom. (So basically everyone is like me.)
At the same time, I think it's worth thinking about how technological advances might underpin the next rally.
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DeFi interoperability gains momentum
There are two main ways DeFi can scale in the short term: Ethereum second-layer solutions and bridging to other blockchains.
Competition on all fronts is fierce. Among the second-layer solutions, the main contenders are Optimistic Rollups and Zk-Rollups. The former allows developers to port Ethereum smart contracts almost one-to-one, but has many user experience issues. The latter seems easier to use, but requires the contract to be rewritten into a new language. Both types are still in beta and we expect to launch in 2021.
While we wait, there are many other blockchains eager to offer their throughput as an alternative to Ethereum. Polkadot is very clearly positioning itself to accept Ethereum's liquidity, but there is also Binance Smart Chain, NEAR, Serum/Solana, NEO, Cosmos, etc.
But the problem now is that all the bridges are not functioning or centralized.
Additionally, the liquidity bridging approach may require a sizable DeFi ecosystem on another chain to be effective. Finding other use cases is critical, and if another blockchain can fill the need before Ethereum, it might win the race.
Right now, it's hard to predict who will win. Ethereum still has no reason to worry about its dominance.
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Miners use their power to extract value from DeFi
An important, but possibly overlooked piece of news this week was the discovery of miners leveraging their capabilities to extract value from the DeFi ecosystem.
This confirms the theoretical concept of miner-extractable value (MEV) highlighted by some researchers in 2019. This problem stems from the fact that the order of transactions within a block is very important to DeFi, and miners are free to choose which transactions to include and in which order.
In this particular example, it appears that some small mining pools included transactions with 0 fees to take advantage of arbitrage opportunities. The fee is set to 2 Wei, so obviously the deal would never be done under normal circumstances.
