The leaves are falling. Cold winds are blowing. After a hot, hot DeFi summer, it looks like we are headed for a DeFi fall (no, but really).
After a month of downward price movements across the board, it seems like the DeFi market is officially in the midst of an extended cooldown.
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Indeed, of 42 DeFi assets listed by crypto asset data firm Messari, only three showed positive price movement over the course of the last 30 days: Hegic, CoTrader, and Uniswap. (Though it should also be noted that 24 of the 42 showed positive price movements over the course of the year, and that 7-day returns look much more positive than the 30-day outlook.)
Summer Lovin’, Happened So Fast
The downfall in token prices represents a massive turnaround from DeFi market trends earlier in the year.
Indeed, Tom Albright, chief executive of Bittrex Global, told Finance Magnates that indeed, “July and August were incredibly hot for the crypto markets in general,” and that throughout those months, “DeFi in particular blazed up and came into prominence.”
In fact, the DeFi craze ‘drove appreciation in altcoins, particularly ERC-20 tokens’, which are altcoins that are issued on the Ethereum blockchain.
#DeFi tokens are taking the lead in rebounding after the market correction with average gains of 19% today. Trade #DeFi coins @OKEx via: https://t.co/oja9Fj66q3 to catch the market trend.
How much longer this #DeFi trend will last? Choose an option & comment your reasons.
— OKEx (@OKEx) September 10, 2020
Beyond scams, there have also been a number of incidents where hackers have exploited DeFi protocols for personal gain. For example, DeFi lending platform, Bzx lost $8.1 million in a new hacking attack in mid-September, the third hack caused by flawed code in its smart contracts this year.
DeFi Will Eventually ‘Cannibalize’ Centralized Exchanges
The seemingly heightened number of scams that have been appearing on the DeFi scene may also be contributing to the cooldown in DeFi token prices.
Beyond that, the scams do not seem to be affecting the long view on where DeFi is headed. A number of prominent analysts within and outside of the cryptocurrency space believe that fully-decentralized protocols will eventually be the norm in the crypto world and possibly outside of it.
This includes Binance chief executive, Changpeng Zhao, whose recent interview with CoinDesk was entitled “Binance CEO Says He Fully Expects DeFi to Cannibalize His Crypto Exchange.” Indeed, that he, Zhao expects that DeFi protocols will eventually win out over Binance’s centralized crypto exchange, which is the largest part of its current business model.
“Our mission is not to build a CeFi exchange,” Zhao said. “Right now it is one of our larger businesses that support our growth. But over the long term, we want to push decentralization.”
However, if decentralization wins out as the dominant business model for trading venues in digital-asset markets, Zhao seems to take an ‘if you can’t beat ‘em, join ‘em’ attitude, saying that Binance could profit by shifting its focus to building decentralized applications.
“In the Future, the Financial System Will Be Broken into Three Parts.”
Bittrex Global chief executive, Tom Albright also believes that DeFi will eventually ‘cannibalize’ CeFi (centralized finance) exchanges.
“He’s right,” Mr. Albright said, referring to Zhao’s comments. However, he believes that centralized exchanges will never disappear completely.
“My hypothesis is that DeFi will take the place of unregulated exchanges that don’t require KYC/AML and ignore security rules and general compliance,” he said. “Centralised exchanges will co-exist with DeFi but only in the regulated form.”
Mr. Albright believes that “in the future, the financial system will be broken into three parts,” including traditional banking, the non-DeFi crypto sector, and DeFi.
“Traditional banks and Financial Services will integrate and incorporate blockchain and crypto technologies, and centralized finance will also play a role connecting to decentralized platforms; libertarians will use DeFi,” he said.
This allows some freedom of choice for users: “each user has to decide their own comfort level and risk level. Some people are comfortable handling private keys and analyzing projects, whereas others just want something simple that works. They don’t want the effort that comes with DeFi.”
Additionally, centralized exchanges could continue to act as onramps into the crypto world, even as DeFi continues to gain higher levels of prominence.
“The DeFi Market Cooling a Little Basically Cooled the Entire [Crypto] Market.”
While the DeFi cooldown is primarily centered on, well, DeFi, the cooldown has had an effect on cryptocurrency markets more generally.
“The DeFi market cooling a little basically cooled the entire [crypto] market,” Bittrex’s Tom Albright told Finance Magnates, which “pushed a number of retail traders to the sidelines. This led to an overall pullback, consolidation of gains and stabilization after heavy volatility in July and August.”
Indeed, while DeFi has been cooling off, Bitcoin seems to be stabilizing. As DeFi markets and Ethereum-based tokens declined through the month of September, the price of Bitcoin traded solidly over the $10,000 line.
Additionally, citing data from Skew, CoinDesk reported that the spread between the six-month period implied volatility for Ether and Bitcoin, which measures the expected relative volatility between the two, dropped to a 2.5-month low of 4% over the weekend, adding to a 21% drop over the past four weeks.
Skew chief executive, Emmanuel Goh told CoinDesk that the decline “could signal a change in market leadership back to Bitcoin after a couple of months focus on the Ethereum complex.”
As such, Bitcoin could lead market movements in the run-up to the United States presidential election, which will take place early next month.