DeFi Demystified: Is it worth the hype?

DeFi (Decentralized Finance):

It is one of the hottest topics in cryptos right now. Almost every coin you see attached with the name "DeFi" is outperforming BTC since the start of this year.

It's something which cant be covered in one article; its not a small topic, its a vast topic. So I'll keep this article short, and cover more in future articles.

A Brief Introduction:
In simple terms: It’s financial platform built on the blockchain. DeFi is essentially just conventional financial tools built on top of blockchain — mostly on Ethereum, with the primary focus on financial products, which are open in nature, where an ecosystem of blockchains, crypto assets, and open protocols are ingratiating themselves with conventional financial structures/markets. DeFi tokens create new and unique ways to gain access to financial markets in a permission-less, in a non traditional fashion.
There are a lot of instruments available in the DeFi platform which any person can utilize.

If we want to understand DeFi in more details, we will need to understand how the traditional finance markets operate (will cover this later).

A nice introduction has been covered in the following article: https://defipulse.com/blog/what-is-defi/

The most popular metric right now for DeFi adoption is total value locked. Source: DeFiPulse.

(Not affiliated with me)

Do check them out to get a basic understanding of DeFi.

Note: If you want regular updates exclusively about DeFi,you can follow Bankless on twitter. (Not affiliated with me)

Top 10 DeFi tokens In terms of DeFi Marketcap: Source: https://defimarketcap.io/

For reference, the third token on DeFi Marketcap, Synthetix, is in 40th position in overall Coinmarketcap.

Some of the notable coins around the DeFi world which gained significant Hype:
And many of them gained more than 5-10x in the last few months.

Coin name	Marketcap	Chart (for reference only)
Comp	$1.95b	https://www.tradingview.com/x/RTKdj0dM/
SNX	$472m	https://www.tradingview.com/x/VfOij9Ra/
MKR	$464m	https://www.tradingview.com/x/L1z44WS6/
BAL	$381m	https://www.tradingview.com/x/o4c8cIN7/
0x	$369m	https://www.tradingview.com/x/rQqN57Hj/
KNC	$342m	https://www.tradingview.com/x/LCJp1a5o/ (mooned)
Lend	$185m	https://www.tradingview.com/x/mLn1r80t/ (huge moon)
LRC	$146m	https://www.tradingview.com/x/YgVGPBz1/
Ren	$138m	https://www.tradingview.com/x/2qFhFmz5/
BNT	$97m	https://www.tradingview.com/x/bzLGXXCl/
AMPL	$78m	https://www.tradingview.com/x/qk5zt314/
Numerai	$58m	https://www.tradingview.com/x/XhSGugOI/

Have a look at the charts. Does this look right? Or are we already in a bubble?

Stay tuned for detailed analysis, later on :)

Remember: People said BTC was in a bubble when it hit $1200, ETH was a bubble when it hit $40, and so on.

A good question is:

Are DeFi tokens overvalued?

Let's again have a look at the Btc dominance (which already broke down?) Refer the Latest Dominance Update in the Litecoin analysis article

Bitcoin dominance chart:

please refer my previous updates to know more :) Chart: https://www.tradingview.com/x/j0vhBOCw/

Are we seeing sentiments similar to the ICO hype back in 2017?

DeFi is of course more complicated than ICOs, unlike the ICO craze, where someone just bought ICOs hoping that they will get rich.
We are still lacking adoption as the average person doesn't know what traditional financial instruments really are, let alone DeFi. We need more awareness. But I can infer that most people are buying up tokens without understanding how they work, hoping that they will moon. (more on this later)
BTC still controls the market. We still see the overall trend of the market is still largely dependent on BTC price action.
DeFi volume is growing.

A point to ponder on: If ETH is related with DeFi so closely, why is it not going up yet?

ETH keeps overpromising?

Or is it that it's fundamentals are not yet in place?

EIP 1559 is still in implementation
Eth 2.0 is on an ever distant horizon
Gas fees is very high
Transaction per second is not impressive.

Why it will not go up:

In 2017 if you wanted to raise funds on Ethereum, you had to use ETH. It was the reserve money. In 2020 ETH competes with dozens of assets.
DeFi doesn’t mean ETH goes up. The utility of DeFi doesn’t have anything to do with the price of ETH. Why should it? People buy the minimum amount of ETH needed to run a DeFi transaction. ETH is like gas for your car—you don’t hold it, you just keep a full tank—the minimum needed.
Ethereum is still a prototype. The market knows another network will(or may) supersede Ethereum. Gas Fees, Transactions per second, all are unsustainable for long term growth of DeFi. So maybe DeFi will go to some other "Ethereum Killer" platform.

Why it will go up:

ETH is the "reserve asset" for DeFi. The only asset that gets scarce with DeFi use, as more ETH gets locked in collateral, and ETH as a trading pair on many DEXes.
DeFi’s reserve asset ETH isn’t threatened by stablecoins or tokenized bitcoin on Ethereum yet. DeFi’s success can be good for ETH. More economic activity increases ETH locked up as collateral and ETH as a trading pair. DeFi token profits may be cycled back into ETH.

Time will tell which one is right about the market :)

A Word about DEX:

DEXs suffer from lack of volumes due to their non-friendly UIs, and I believe they are still in their early stages of adoption, and they need a lot of improvement. 90% of the people dont know how the markets work, unfortunately, and people in crypto expect that they know how DEXes work?

About Adoption:

I personally believe crypto is no where near "Mass adoption". We are not using crypto outside of the crypto world. So unless the outside world chooses to come in to crypto world, we may not see the so called "Mass adoption".
Though I feel there are a lot of triggers for mass adoption.

Lets have a brief look at the short term DeFi index chart (Available on FTX)

Note: I have embedded my referral link. If you are interested to join with the link, you'll get some discount :)

Link: https://www.tradingview.com/x/2IChOJ5D/

Currently on a shorter timeframe, we can see it is on an uptrend, though I'll be waiting a bit to get in on pullbacks, depending on situation. :)

"Tony Sheng, a crypto analyst and investor of MultiCoin Capital, recently identified five risks that investors trying to seek high stablecoin yields are facing:

Smart contract vulnerability in the lending protocol. Smart contract vulnerability in the underlying asset, whether that’s USD Coin, Tether’s USDT, or an altcoin. A liquidation event that results in lenders losing their cryptocurrency. Such liquidations can be triggered by large swings in the price of Ethereum or other cryptocurrencies.

Failure in the economic design of a protocol, which can be caused by misaligned incentives. User error." Source: https://bitcoinist.com/some-ethereum-defi-users-100-apy-multiple-risks/

DeFi may be the "Next big thing on Crypto" which may trigger mass adoption; but also if ssome of the critical points above are addressed. Lets see where it goes. It may even take a lot of time.

Note: BTC price action is pretty much choppy with no clear direction. And Btc is still correlated with S&P, and the other major stock markets. so if you are willing to take less risk, you can wait for the traditional markets and BTC to take a direction and then enter on your "favorite" DeFi coin, even though many of them looks a bit overvalued at least on shorter timeframes. :P

I'll cover a few DeFi "Gem" coins in my next article, so stay tuned 😏 (Of course I'll never guarantee that they will "Pump" and show you the moon or something like that. I'll just cover a brief article on why the coins are undervalued)

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Posted Using LeoFinance