Yield farming is adding to the noise about DeFi, but the fundamentals are lagging

The excitement over decentralized finance (DeFi) is sometimes attributed to the fact that it sparked a wider spike in market prices in July. when new protocols started releasing tokens They immediately posted a multiple of their original value. However, despite the undeniable price growth it is not immediately clear whether the sector has grown as a whole, because reliable metrics for It is incredibly difficult to measure the basic performance of DeFi protocols.

The projects lend themselves to fairly rigorous analysis methods. because they often have well-defined income and expenses. But the growth in liquidity or income farming * is somehow unbalancing the metrics. The protocols essentially reward their users with their own government tokens as payment for using the platform. A hectic move to maximize the performance of these tokens It skewed DeFi’s dominant success metric, Total Value Locked, or TVL.

A clear example of this is the composite protocol, where The value of Dai made available to you will nearly triple your total number of tokens: $ 1.1 billion versus $ 380 million at the time of writing. This is due to composite users Enter leveraged positions in Dai, something that normally doesn’t happen with stablecoins. While this was leading the church discuss the benefits of the TVL, some other similar measures They were also distorted.

Evaluation of a DeFi loan project

Yield farming is adding to the noise about DeFi, but the fundamentals are lagging
Yield farming is adding to the noise about DeFi, but the fundamentals are lagging

Evaluation metrics They change slightly depending on the type of project. In the case of loan logs like Compound and Aave, The TVL represents the liquidity on the supply side of the project or the total of all deposits currently in existence. It is worth noting that The TVL only considers chain reservations. According to DeFi Pulse, there is only about 220 million Dai are included in Compound, not 1,100 million.

DAI blocked in connection

DAI blocked in connection. Source:

However, lenders usually They are valued based on book value or the amount borrowed. Since is what generates income is much viewed as a measure more direct for protocol finances.

Due to the distribution of the network currency COMP, however, all tokens except Tether (USDT) and 0x (ZRX) have negative effective interest on borrowing, after the compound panel, which means that users get paid for it. The current composite protocol You are diluting those costs off to COMP buyers and owners.

Although it can be difficult to filter How much liquidity there is just to speculate on COMP returns may not be required. The purpose of evaluating the bank’s earnings or loan log it is to be measured how much of this value can be recorded by the releases or the token, but there the token is used To subsidize the cost of loans, the value is effectively deducted from their holders. This can be seen from the price of the COMP token. Since its inception Its value has continued to decline due to the dilution and selling pressure of the newly mined tokens.

COMP Token Price Chart

COMP price chart. Source: TradingView

Because of this phenomenon, a strategy of The valuation for Compound can easily be to ignore or even subtract the portion of the book value that extracts the value from token holders. Even in the first case, the book value of compound is It would be only $ 25 million of the $ 1 billion claimed – the total of USDT and ZRX that are on loan.

Although obviously Not all assets are just there for returns. Cointelegraph previously reported Dai was only borrowed $ 30 million just before it became the currency of choice for generating liquidity. Andre Cronje, the founder of the protocol yearn, said Cointelegraph that the market did not take these nuances into account: “We have this strange mentality that TVL equals rating, which I don’t understand at all. If TVL is $ 100 million then market capitalization (current, not fully diluted) should be $ 100 million. “ Although he thinks “totally crazy” He ignored the income and continued his mental exercise:

“If circulating market capitalization is equal to TVL, what is the best way to increase it? Increase the TVL. How do you increase the TVL? Token rewards. The value of the token increases due to TVL speculation and the cycle repeats itself. “

Effects on other protocols

Connection started the trend of crop breeding, However, it wasn’t the only protocol that saw significant increases due to this activity. Decentralized exchange like At Uniswap, Balancer and Curve, the trading volume has increased dramatically since June. The volume in Curve, a DEX focused on the exchange of stablecoins among each other, It was over when productive farming started in June.

Monthly volume via decentralized exchanges

Monthly volume on decentralized exchanges. Source: DuneAnalytics

Uniswap has a much more diverse range, and the largest part of its volume consists of ether pairs (ETH) to stable coins, especially Ampleforth, which has seen a strong boom-and-bust cycle. Also absorbed Much of the volume of new tokens like YFI is often the first place they are listed.

MakerDAO would have nearly tripled its TVL from $ 500 million. The most is due to the rise in the price of ether, although it also grew in terms of ETH and Bitcoin (BTC). As Cointelegraph previously reported, The community decided to increase the total amount of Dai that could be created to bring the price back down to $ 1.

While Dai’s growth can be seen as a success story at first glance, The maker community decided to zero interest rates on virtually all cash and forego any income from growth. At the same time, Connection was the main recipient of the new Dai, with a locked value that is rose from about $ 140 million to $ 210 million since late July, more than 55% of all Dai.

Is the Growth Real?

The liquidity boom has undeniably had a positive impact on some broad metrics. Specifically, the traffic to the DeFi platform websites and the number of users interacting with the logs. The data from SimilarWeb show that Compound traffic has quadrupled from June to about 480,000, While for Uniswap has more than doubled to 1.1 million, and Balancer was well represented in two months with 270,000 monthly visits.

In addition, the DeFi exchange aggregator, Traffic has almost tripled in the past two months. Protocols with a weaker relationship to productive agriculture also benefited MakerDAO and Aave are seeing more modest but equally significant growth.

In terms of user volume At Compound, the number of monthly average wallets quadrupled to 20,000 in June. although that number has since decreased. It’s also worth mentioning that more than 80% of recent activity comes from just 30 wallets, according to DappRadar data.

User activity on connection

User activity in connection. Source: DappRadar

The total number of DeFi users, based on a visualization from DuneAnalytics, increased by about 50% from June 1st to August 1st. This is in contrast to the last two months from April 1st to May 31st, which saw a growth of 30%.

The vast majority of these new users come from decentralized exchanges, Uniswap has doubled its total user base to 150,000 since June. However, this metric shows All users who have interacted with the logs, not just those who are active at any given time.

Overall DeFi users

Overall DeFi users. Source: DuneAnalytics

What’s left?

In short, DeFi’s growth over the past two months has been diverse. While the liquidity runoff and subsequent price hikes have likely helped attract additional attention, Fundamental metrics were heavily skewed due to speculation.

The decentralized exchange seems to have benefited most from this hype. both in terms of new users and in terms of volume, but this appears to be an acceleration of an already positive trend. Whether growth will continue remains a very important question. Cain Warwick, Co-founder of Synthetix, A cryptocurrency asset issuer told Cointelegraph:

“It is always possible for people to cultivate the crop and then find a new field. So the initial liquidity is no guarantee that their log will keep users. […] However, starting liquidity with an incentive is a great way to attract newcomers because if you have something that is similar to the product market, some users are likely to stick with it. “

Cronje was something more negative, Using an agricultural analogy to describe what could happen, saying: “All performance chasers just go to the performance farm and then leave.” which for It’s a negative because it acts like a swarm of locusts. added: “But after they ruin the crops, sometimes a stronger crop can grow and some locusts are left behind, and they are more symbiotic than the original parasite.”

Cronje thinks so The initial effects of high-yield farming are unsustainable. this creates a misperception among newcomers that 1,000% returns are the norm. As soon as this is no longer the case, Users will have a bad taste in their mouth, argues: “Right now it’s overrated; soon it will be hated; and what’s left after that, I think, will be very good.”

Distribute tokens in a new way

Warwick described the purpose of liquidity mining how to encourage early participation with partial ownership. Cronje he was much more skeptical and said: “At the moment, the entire liquidity reduction is being financed by TVL.” Even so, he ran a liquidity mining program himself, although he stressed it It was just a way to distribute tokens.

“My goal was to reach an active and engaged community. And I think yEarn achieved that. “ Cronje closed. Vice versa, yEarn’s forks like YFFI and YFII were “mines with pure liquidity, and all that happened was sales by people”, said. The price of YFII fell 90% from its July 30 high.

Warwick noticed that “There may be a better way to distribute the property while the growth begins,” although he doesn’t know how. Still find it preferable to initial coin offers, as users only need to temporarily compromise their liquidity: “Of course they do take some platform risk, but it is still preferable to lose their capital in order to buy tokens.” But While the risks for liquidity miners may be minor, the YFII example clearly shows that the effects of dilution and speculative demand can become catastrophic for buyers of these tokens.

* The DeFi ecosystem terms are in English

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