DeFi tokens are having a rough month after record performance

DeFi tokens as a whole have had record performance in July and August; severely outperforming Bitcoin and Ethereum. 

FTX’s DeFi index has reached a peak of $3,500 on September 1 and has since dropped by 44% and is currently sitting at a 50-day low of $1,960. 

Source: Tradingview, FTX

Why now?

As always, it’s hard to say what exactly caused the cooldown. One simple explanation is that the enthusiasm has been exhausted after two months when market buyers subsidized the yields. Most of the yield farming schemes relied on market participants to buy the new governance tokens, which were then being distributed to people that staked their capital — popularly called the yield farmers. 

Why were people market buying the tokens and letting yield farmers dump on them? Maybe because they simply didn’t realize? Perhaps the simplest explanation, however, is that market buyers were chasing another token like YFI, which would greatly appreciate in value and bring them the riches. But as the market kept getting diluted by useless food tokens, the supply of market buyers slowly decreased and the yields started to collapse.

As I’ve pointed out three weeks ago, the number of retail investors was still nowhere close to December 2017. As more projects kept popping up and lept exhausting the relatively small investor base, even the legitimate projects with a proper product-market fit started struggling. The price of tokens is simply a relationship between the new supply added to circulation and demand to buy such tokens. The amount of capital didn’t increase fast enough.

Performance of DeFi tokens

Most DeFi tokens are down more than 40% from their high in the last month. The best-performing assets have been Loopring, Maker, and Aave. The worst performing assets have been the two forks, Swerve and SushiSwap, and then also bZx, which suffered its third exploit already.

Source: Coingecko, The Block Research

Listings

Perhaps because we were (or still are) in a speculative mania, DeFi tokens had seen major pumps following listing announcements. Most tokens pumped by more than 30% following the listing on the leading retail exchange Binance. 

Binance has now listed virtually all DeFi tokens, which also shows that most of the purely retail investors have already been familiarized with the majority of the DeFi tokens. Coinbase has so far listed only YFI, UMA, Uniswap, Compound, and Loopring.

Source: The Block Research

Outlook

Not many DeFi protocols have a clear cut product-market fit and some tokens were clearly getting ahead of their fundamentals. The collapse of yields is healthy and will help create a much more sustainable market. What remains to be seen is whether the interest in DeFi protocols is sustained when the opportunity to make a lot of money quickly gets smaller.