Three Reasons Why DeFi May Have Reached its Peak

There is no doubt that DeFi has been the driver of all things crypto this year, ostensibly in the same way that altcoins catalyzed markets in 2017. According to one analyst though, the nascent industry may be at its top.

Since the beginning of 2020, the Decentralized finance marketplace has expanded by over 1200% in terms of total value locked which has now hit a milestone of $9 billion. Comparatively, total crypto market capitalization has only managed to gain 90% over the same period, and much of that has been driven by DeFi related tokens.

The one year chart does look a little parabolic which is indicative of a bubble, and one analyst is of the opinion that it is about to burst.

Too Difficult to Use

Bitcoin trader going by the twitter handle ‘Theta Seek’ (@thetaseek) has tweeted a number of reasons why, in his opinion, DeFi has reached its peak.

DeFi thread – Why I am calling the top (At least for now)

1/ DeFi is too difficult to use.

While traction for DeFi (AMM + deposits/yield) has grown tremendously over the past few months, DeFi is difficult to use, the ability to lose funds scares most new users away.

— THETA Seek (@thetaseek) September 18, 2020

The first major reason is that it is too difficult to use and small slip-ups could result in the loss of a lot of money. To engage with DeFi protocols users need to have some knowledge of crypto wallets and how blockchain transactions work, and this effectively eliminates the masses.

He uses a recent case where Tether refunded around $1 million to a group of Chinese traders that sent it to an address that didn’t accept USDT as an example.

Little New Money Entering The Space

Moving on from the hard to use narrative, the analyst added that most people using DeFi are already crypto users indicating that they are using their crypto holdings and little new capital is entering the scene.

A massive surge in stablecoin circulation could evidence this as crypto gets converted into stablecoins to use for liquidity farming.

“Other than ETH, USDC is one of the most used stablecoin in the space. MarketCap of USDC increased by 800M (“new money”) in the past month while DeFi market cap inflates by more than 3B in the same period,”

Tether’s market capitalization has increased 275% this year and has just topped $15 billion with 66% of that being based on Ethereum.

Diminishing Returns and Yield Jumping

Yield farmers (called degens in crypto speak referring to ‘degenerate’) will rapidly flock to the latest hot DeFi food meme, then jump ship onto the next one as soon as returns diminish.

This can be seen with the likes of SushiSwap, its token printing and the resultant pump and dump, and Yearn Finance’s yETH vault which started off returning 90% and now only yields a paltry 2%. Compound Finance is another example as liquidity jumps from one protocol to another sliding down the TVL chart from top spot to eighth.

A money grab culture has been cited as probably the top reason for the prediction with open-source code and contracts that gets cloned and forked, and a resultant limited loyalty to DeFi protocols.

Finally, a regulatory crackdown could throw the biggest bucket of icy water over the red hot DeFi fire.