Three Reasons Why Decentralized Finance May Be Living Its Best Moments
The year 2020 has been increasingly successful for DeFi, which has managed to become the main trend for all players in the crypto market. DeFi has shattered the whole industry with its brand-new approaches and astonishing pace of innovations, just like altcoins did back in 2017. But as many specialists in the industry note, DeFi may well be at its peak.
Since the early days of 2020, DeFi has been developing ahead of everything else, and it has managed to craft a well-reputed track record. Its total locked value has increased by 1,200% and hit an all-time height of $9 billion, which is 10% more than the total crypto market value. The majority of that growth has been due to the DeFi-driven tokens.
A yearly chart of the total value locked in DeFi shows a steep rise forming a parabolic pattern, which means that the rates will soon increase by a large amount. However, a parabolic rise can also represent a bubble formed by irrational demand or speculation, and some industry experts believe it is going to burst soon.
Too Complicated to Use
Numerous opinions hover all over social media about why DeFi’s current achievements may be its top. Users and specialists note that DeFi is still quite complicated to use, and many users may be afraid to lose their hard-earned money on a technology that is hard to comprehend. Not understanding the tool means no control over it, a poorly informed decision-making process, and little trust from regular people and investors. Dealing with DeFi requires substantial skills and expertise in how digital wallets and the blockchain function, as well as an understanding of how DeFi-backed transactions are made.
Some traders have already lost funds due to insufficient knowledge of how DeFi works. For example, Tether had to recover and return $1 million worth USDT to users from China that were stuck in an address that didn’t accept Tether tokens.
Insignificant Amount of New Investments
Most users in the DeFi space are already dealing with cryptocurrencies and are inclined to keep using their own digital assets, so the DeFi sector isn’t receiving much new capital. The enormous craze around stablecoins and their use serve as the best proof of DeFi’s capital losses. Cryptocurrencies are being converted en masse into stablecoins to be further used for yield farming.
USD Coin (USDC), a child of Coinbase, is one of the most popular stablecoins in the crypto industry. Its market capitalization has surged by $800 million in the last month, which is the amount of new capital entering the USDC space. DeFi showed a $3 billion inflation for the same period.
Another trendy stablecoin, USDT, has reached 275% growth in its market capitalization since the start of the year, hitting $15 billion, with more than half of it being built on the Ethereum blockchain.
Fewer Returns and More Yield Farming
Yield farmers are on the hunt for liquidity, which has led to numerous DeFi protocols being duplicated. DeFi platforms, being mostly built on the Ethereum blockchain, have experienced unprecedented popularity this year, but increasing fees are scaring users away, putting them in the position of looking for alternatives.
The two main DeFi clones got their names from cooking vocabulary and their base, Unswap (BurgerSwap and BakerySwap), with BNB pairs substituting ETH in liquidity pools and causing price bubbles. This situation has led to fewer real returns on investments.
A good piece of evidence of token inflation in the DeFi space is the price behavior of the SushiSwap token, which has demonstrated dramatic ups and downs, or Yearn Finance, whose returns on Ethereum vaults rapidly fell from 90% to 2%.
The urge for money is the number one reason why publicly available codes and contracts are being cloned with competitive forks. This core pain point sharply decreases the level of trust in DeFi.
Ultimately, regulatory uncertainty may be the final blow pushing DeFi off its peak.
