Aside from Bitcoin gaining a perfect storm of macro factors, one of the biggest narratives in the crypto market over the past few months has been decentralized finance (DeFi). The DeFi industry has seen vast amounts of investment while the number of users in blockchain-based finance products has shot up rapidly.
Ethereum-based DeFi coins explode in value
In the past 30 days, the second native asset of the MakerDAO ecosystem, Maker (MKR) has exploded higher by 120 percent, according to data from CoinMarketCap. Over that same time frame, Bitcoin gained 13 percent while Ethereum saw a 30 percent increase in value.
MKR’s outperformance comes on the back of three fundamental trends:
- A listing on Coinbase’s professional platform, which is one of the first times the asset can be traded by a retail audience in the U.S.
- An increase in MakerDAO demand spurred by the addition of alternative assets to the collateral pool.
- An increase in usage of DeFi applications, which all involve MakerDAO’s DAI token.
Other coins representing DeFi have also outperformed. Ethereum investor “Arthur_0x” noted that certain altcoins in this industry — such as Kyber Network’s KNC, Loopring’s LRC, Aave’s LEND, Bancor’s BNT, Gnosis’ GNO, and Airswap’s AST — have strongly outperformed Bitcoin since the start of the year.
According to Kelvin “Spartan Black” Koh, partner at The Spartan Group and formerly of Goldman Sachs, the strength in MKR (and presumably other DeFi tokens) affirms “strong interest and momentum” in the DeFi space.
DeFi is tapering out… for now
While DeFi has seen growth — both in terms of its native assets and user base — over recent months, some fear that it is a trend whose growth is tapering out for the time being.
Multicoin Capital managing partner Kyle Samani released an extensive blog post on Jun. 4 outlining why Ethereum’s budding finance space is “facing some real challenges,” and thus, is staring down a “plateau” in growth for the time being.
Samani explained that there exist clear “latency” issues with Ethereum which are preventing the mainstream adoption of DeFi products:
“You just can’t build global scale trading systems for lots of users on POW chains. It just doesn’t work. High latency –> all kinds of negative second order effects. So I think for now we are near a plateau for DeFi – measured in ETH terms (not USD) – until the core latency problems are solved.”
Ethereum’s 13-14 second block time seems to be his main gripe: high-frequency trading, where every millisecond may amount to more or less profit, and other financial functions are made difficult when you don’t have the speed of the internet on your side.
Samani also identified a lack of fiat on-ramps, a lack of trading functionality in decentralized applications, and a lack of abilities to obtain leverage in the DeFi space as issues for this budding part of the Ethereum economy.
Multicoin Capital has investments in the DeFi space, making these comments more constructive criticism rather than an attack on this segment of the Ethereum market.
Bitcoin could get a boost with altcoins booming
Although DeFi coins are getting a massive boost, some of those gains could soon be siphoned into Bitcoin as investors begin to realize that they need to preserve the gains they made.
Koh explained in response to Su Zhu’s comment on CME options that the growth in DeFi coins over the past few weeks while Bitcoin has been stuck in a range is a clear sign that “risk appetite is returning” in the crypto market:
“We have seen a major re-rating in many of the smaller altcoins (esp DeFi ones) in the past 4-5 weeks while BTC has been range-bound.”
To him, this means that altcoins will soon reach a point where their valuations are “frothy,” forcing capital to flow back into Bitcoin, boosting prices.
This is somewhat similar to what happened near the end of 2017, when certain altcoins saw exponential explosions in value, which then forced smart investors and whales to sell their altcoins for Bitcoin, boosting BTC.
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