Digital Asset Market Participants’ Perception of DeFi Tokens Shifts from Speculation to Identifying Long-Term Investments: Report

Digital asset exchange OKEx recently published a report, titled: “How centralized exchange volumes illustrate DeFi’s boom-and-bust cycle.” With market data provided by Kaiko, OKEx Insights looks at DeFi‘s “boom-and-bust cycle” in 2020.

The exchange notes in its extensive report that as 2020 comes to an end, the DeFi sector is “proving to be one of the year’s hottest segments” of the blockchain and crypto-assets space.

The report confirmed that DeFi yield-farming “exploded” over the summer months of this year as large amounts of funds kept flowing into all types of digital currency protocols. However, the market quickly began to cool off when the “ultra-high” yields started to disappear in September 2020. OKEx points out that “after the bubble burst, many top DeFi token prices posted heavy losses the following month.”

But partly due to the surge in Bitcoin price and to the “anticipation for the launch” of Ethereum 2.0 (ETH2) on December 1, 2020, the “optimism around DeFi has been recovering — and so have the prices of DeFi tokens,” OKEx’s report noted. It added that centralized crypto exchanges such as OKEx have also served a key role in promoting the adoption of DeFi initiatives (mostly by aggressively listing new coins without conducting proper due diligence).

The report further notes that while many digital asset exchanges have been very quick to list speculative DeFi tokens, these coins only accounted for 19% of OKEx’s “total spot trading volume.” But this figure jumped to 25% in September 2020, the report revealed.

Going on highlight some of the most notable DeFi-related events this year, the report from OKEx noted:

  • The introduction of Yearn.Finance’s YFI governance token around mid-July 2020
  • The launch of Curve’s CRV governance token in August 2020
  • SushiSwap’s “vampire attack” on non-custodial exchange protocol Uniswap by adding its native  SUSHI token as a reward for liquidity-providers (LPs) in late August 2020
  • Uniswap’s airdrop of its own governance token, UNI, to its community members in September 2020

It’s worth noting that the total value locked (TVL) in DeFi contracts surged from around $1 billion in February 2020 to now well over $10 billion. The report also pointed out that on September 2, 2020, Ethereum (ETH) transaction fees reached an all-time high of around 0.032 ETH per TX (worth about $15 at that time). The TVL in DeFi then experienced its “largest retracement, falling from the high of $9.75 billion to $7.79 billion in the span of only four days in early September,” the report confirmed.

The report from OKEx added:

“The migration away from DeFi protocols in September came at a time when both traditional and cryptocurrency markets were hit hard. This translated to a sell-off of DeFi tokens, which pushed their prices down even further. However, the total value locked has resumed rising since then, with various twists and turns. Likewise, the sum of all DeFi projects’ market capitalization has generally been on the rise in November — though, this figure still hasn’t recovered from its Sept. 2 all-time high of $19.55 billion.”

The report further noted:

“Prior to September 2020, DeFi’s long-time leader by market capitalization, LINK, dominated up to 80% of the trading volume of the 10 tokens selected (for OKEx’s analysis including Balancer (BAL),  Compound (COMP), Curve (CRV) , Kyber Network (KNC), Chainlink (LINK), SUN, SushiSwap (SUSHI), Uniswap (UNI), yearn.finance (YFI), DFI.money (YFII))….. The arrival of a SUSHI perpetual swap on OKEx started to eat away at a portion of LINK’s dominance. By Sept. 6, SUSHI’s perpetual swap trading volume had surged to $10 million, taking a 10% share away from LINK’s dominance. Further growth in DeFi trading volume continued over the following week, with the swap trading volumes of YFII and YFI reaching $51 million and $28 million, respectively, by Sept. 12. As a result, LINK’s trading volume dropped rapidly, with its dominance falling below 25%.”

OKEx’s comprehensive market report concluded that DeFi might be “here to stay.” After looking closely at DeFi-related trading data during the past few months, OKEx claims that it has found that newly issued decentralized finance and yield-farming tokens went through the “boom-and-bust cycle common among new asset classes.” However, it now seems that crypto industry participants’ “perception” of these digital tokens has “gradually shifted from irrational to rational as they tried to identify tokens with long-term value,” OKEx claims.

After the market began maturing in some ways, the leading DeFi tokens “bottomed out” last month, OKEx’s report noted. It also pointed out that on November 24, 2020, DeFi’s total market cap again surged to around $19.2 billion — which is still below the all-time high.

The report added:

“From the liquidity-mining boom in the summer to the rapid decline in the early fall and then the more mellow resurgence over the past month, we can see that decentralized finance’s story is far from over. With a full bubble-bursting cycle under its belt, DeFi could see renewed growth and activity in the coming months.”

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