The pace of gains in DeFi is crazy.
Also known as Decentralized Finance, the DeFi sector is booming in anticipation that it would change the way people look at finance.
Instead of a prominent banking corporation sitting in the middle of a borrower and a pile of cash, one has an automated protocol governing the lending part with the financial assistance of a pool of stakeholders and depositors. A shady-looking, user-spying exchange faces competition from a chilled-out alternative with no central control/authority. And then, there are asset managers that provide users an on-chain exposure to real-world currencies, commodities, stocks, and indices.
The core of all DeFi models is the same: to lock funds into a pool so they could back the services. Traders who trust the DeFi businesses buy their native tokens in anticipation of exponential returns or stake their capital into their wallets to earn steady yields.
The promise alone has caused what appears to be the DeFi boom. In the second quarter alone, total value locked with the DeFi platforms surpassed over $2 billion. And with it, the demand for their tokens have skyrocketed.
Take decentralized exchanges, for example. The two dominant players in the space – Kyber Network and Uniswap – reported a significant spike in their trade volumes. That came at a time when both underwent significant upgrades in their underlying protocols.
Now have a look at the performance of their native tokens. The Kyber Network’s pet cryptocurrency KNC surged by an astonishing 712 percent on a year-to-date timeframe (charts courtesy to CoinStats crypto portfolio management app).
BTW. Uniswap does not have a native token, exactly. The non-custodial exchange, instead, maintains liquidity pools and pays its backers a 0.3 percent trading fee.
Interestingly, the concept of Liquidity Pools helped raise the token prices on non-DEX projects. Decentralized synthetic asset platform, Synthetix, used the same model to attract about $263 million worth of assets – an all-time high – as of this week.
Meanwhile, SNX, an asset one stakes to use Sythentix’s synthetic tokenization services, surged by 526 percent since it first started trading in April 2020. One has to know that Ren Project and BitGo created their bitcoin-backed tokens – namely sBTC, renBTC, and WBTC – on Synthetix earlier this July.
Its competitor Melon also reported $1 million worth of assets under management. The platform’s native token MLN surged by 400 percent in Q2.
COMPOUND, a decentralized lending protocol, also nailed the Liquidity Pool model. The total value locked inside its wallets reached $647 million, with its native token COMP surging by more than 200 percent during Q2 on rising demand.
One of its top competitors, Aave, also reported an explosive surge in the value locked inside its pool – from $25 million to over $200 million. The lending project’s growth was visible in its native asset LEND; it surged by over 500 percent in Q2.
Suffice to say that people are hunting for yields.
It is not just the DeFi projects that had a rocking year so far – even the firms that offer them services benefited from the rally.
Chainlink, a decentralized oracle network, didn’t enjoy much attention at the beginning of this year. But the project came on its own as it kept on signing lucrative deals with other DeFi projects. The task is straightforward: to feed public blockchains with off-chain data from markets, events, and payments through a decentralized network.
That allows anyone with a data feed to join Chainlink. They become node operators that get paid in Chainlink’s native token LINK. These operators can also stake their LINK to assist the smart contracts that require collateral. That makes Chainlink an ideal partner for DeFi lending projects.
It is perhaps among the few reasons why LINK started surging exponentially in the second quarter. Ahead of its close, the LINK token price was up 293 percent already.
Another Reason for DeFi Craze: A Boring Bitcoin
Despite all the mouth-watering fundamentals discussed above, one of the significant reasons why DeFi projects have boomed so far is Bitcoin – a pretty boring one.
DeFi tokens started rising almost alongside Bitcoin after March 2020 global market crash. Back then, traders were super bullish on Bitcoin because of all the hype surrounding its third “halving.” But as the event passed on May 11, the BTCUSD price restricted itself to a trading range, wherein $10,500 acted as the ceiling and $8,800 as the floor.
The $2,000-area later squeezed into a $300-range. Bitcoin is now finding it difficult to cross even above $9,300 while maintaining a strong foothold near $9,000-support.
Boredom may have sent traders towards the DeFi market. Meanwhile, analysts like us merely started justifying the price rally using the fundamentals that were there before buying spree.
In the end, hype beats common sense in the cryptocurrency market. Even the 2017’s ICO boom made people rich until the real tragedy struck.