Markets are cyclical in nature. Trends rise and fall, causing stocks and assets to make subsequent moves. Some of these broader bullish trends become bubbles, often accompanied by parabolic rises in value. Several Twitter pundits and influencers have compared the recent DeFi surge in popularity to a financial bubble and its recent drop as the “pop.” But if we take a look at the market and ecosystem in which DeFi operates, we can quickly see this is not the case, far from it, in fact. Mark Twain perhaps said it best when he allegedly remarked, “Rumors of my death have been greatly exaggerated.”
There are a few key metrics to look at when quantifying the DeFi space. Looking at the DeFi Futures chart from FTX, we can see that DeFi tokens prices are dropping. The DeFi Futures is a basket of eleven DeFi coins, including KNC, LEND, MKR, and others.
This chart is clearly trending down, much lower than its peak in September. Critics will point to this and claim that DeFi peaked in early September and that it has been all downhill from there. But one chart does not a market make. The drop in the price of DeFi tokens does not tell the entire story. Furthermore, considering that DeFi is still extremely early in its lifecycle, it is premature to assume that this will not recover. Much larger sectors tanked in the 2008-2009 financial crisis only to make more significant all-time highs.
Total Value Locked (TVL) is an important data point to consider. TVL is a measure of the total price of DeFi assets held under smart contracts. That is, it tallies the value of all DeFi assets currently being staked or held in yield farms. These are assets effectively removed from the circulating supply.
DeFi Pulse is a useful way to check the TVL for DeFi. The graph is self-explanatory; TVL has grown from $4 billion in August to close to $12 billion in late October and is still climbing; that is a 3x increase over three months. Uniswap accounts for the most value at the moment, with over $2.7 billion in TVL. Even if the rewards for tokens goes down, as the previous bearish chart showed, confidence in DeFi and yield farming is only growing. While most of the volume is on Ethereum, Binance Smart Chain (BSC) is quickly making a name for itself less than a month after its debut.
The Case for DeFi
Thus far, Decentralized Finance has replicated only the most basic functions from the legacy banking system. Borrowing, lending, loans, and earning interest are relatively simple functions to create using smart contracts. Companies like Celsius and Blockfi can deliver consistent single-digit returns to their investors. Loans on Maker DAO are executed using Ethereum smart contracts. But this is only scraping the surface, as CoinGecko’s Bobby Ong describes it. In a series of tweets on 10/19, the CoinGecko COO hypothesized that more sophisticated financial vehicles would be making their way into DeFi sooner than later. In particular, the collateralization and repackaging of crypto loans.
Taking things a step further, Bobby opines that we could further repackage these debt obligations into CDOs or Collateralized Debt Obligations. If CDOs sound familiar, it’s because they played a vital role in the film “The Big Short,” which detailed the 2008-2009 financial disaster that nearly collapsed the entire banking system.
Astute readers may balk at the idea of migrating potentially harmful banking practices over to DeFi, especially ones that so nearly ruined the world financial markets. Creating tranches out of crypto-collateralized loans may seem like the most speculative investment, even for crypto investors. And if this happens, there is the possibility Crypto CDOs (CCDOs) may collapse, losing millions of dollars. But this continual trial and error are all part of the process of innovation. Failures, even those that lose money, allow companies and projects to pivot, change course, and improve on the next version. Even the CDOs that put the world on a financial precipice are still around, albeit with a few minor tweaks and changes.
The point is not if a financial product makes an investor money (that falls under risk management), but rather the advancement of technology used to create the product. Creating, managing, and securing CDOs will likely take more complicated Automated Market Makers (AMMs) and make multiple on-chain transactions once they are ported over to blockchain. One blockchain ready to handle the increased complexity and throughput required for these financial vehicles is Lattice from Constellation Labs. Utilizing the same Hypergraph technology Constellations DAG is built on, Lattice is positioning itself to be the frontrunner for DeFi. It offers instantaneous transactions, tiny fees, and increased computational capabilities than the current DeFi blockchain offerings. When CDOs, or whatever comes next, finally hit the market, they will likely not be running on Ethereum due to its high fees and slow transaction time.
Financial technology is a complicated subject. Throw in a new and speculative asset class and it can quickly become overwhelming to even a fairly intelligent individual. But one thing everyone in this space can understand is the constant march of progress. Our humorist friend Mark Twain understood this all too well, as a few of his stories dealt with imagined future technology. While his ideas about giant robots and electric tanks seemed outlandish during his lifetime, these ideas are commonplace now. Similarly, the interest in DeFi will only continue to grow as technology catches up to the initial spark of inspiration.
The Daily Chain
*Disclaimer – Lattice is our Media Partner, and this content is made possible with their support. The above article does not represent financial, investment, or trading advice and we do not recommend the purchase of any cryptocurrency or product without consulting a financial aid. The Daily Chain strongly encourages you to do your own research before making any investment decisions.