DeFi is playing an Expanding Role in the Crypto DomainJuly 14, 2020
In the previous couple of weeks or nearly two months, bitcoin has been a source of disappointment for many in the same ecosystem. After the halving of 2020 took place, most analysts were cautiously certain that the price needs to move up. However, while this did occur in a small part, for most of the post-halving period, things have been super calm. Now, there are like always multiple narratives why the price of BTC did not skyrocket even for a short while, knowing that the setup offered all the right elements.
These include volatile traditional financial and economic fields, weeks of pre-halving buying and stocking up on crypto, and overall, strong state of cryptocurrency markets. These cover both bitcoin and other top-ranked digital currencies in terms of price and market cap, but also many altcoins that are also in a strong and stable position. In fact, some of these have been marking a period of unprecedented price growth. So, with all of that, how is there no sudden and clear movement on the market?
Beyond the regular murky elements like the wider socioeconomic and geopolitical situation, some are possibly more wisely pointing towards the DeFi field, which stands for Decentralized Finance. In the previous three months, even before the halving, this space saw a huge change and one of the better. Here is why DeFi is important and what is its interplay with crypto (and even traditional) markets.
There are many forms that decentralized finance can take. These include, but are not limited to things like derivatives, payments, lending, and exchanges. There is a lot of interest around this concept and it is generating more of it all of the time. This is building it up to a state where boom and bust cycles come one after another. Most recently, the latest boom came in the shape of liquidity mining. This is basically an incentive program that was designed to help new DeFi protocols gain new users and with them, liquidity as well. These programs usually give out what they call governance tokens to the providers of this liquidity.
The receivers of the tokes are known as yield farmers. Some are now calling the entire concept the rocket fuel that is consumed by DeFi protocols to reach an amazing level of success. These are nothing new, but once again DeFi demonstrated that smart incentive programs can work as the best possible growth hacks. These in turn resulted in large spikes in the participation of these networks and a lot of total value of token getting locked into them. In turn, the market cap of these governance tokens also rose quickly.
One of the best examples of DeFi programs is the Compound protocol. It is a decentralized lending system that allows users to both lend and borrow from a pool of assets without any particular permissions. The COMP governance tokens that are in the system shoot up with the popularity of the protocol and right now, two platforms that use it see about 670 million USD and 500 million USD locked in the same wider system.
On one hand, liquidity mining seems to have little correlation with the movement of bitcoin price, but when space is observed in more detail, there is still a connection. In order for any participants to get their yield farming governance tokens, they have to take part either in lending or borrowing. This in turn demands that they deposit their funds into a pool that the borrowers can access and thus provide lenders an interest that is above regular market interests. Thus, they are taking their ETH and BTC tokens and locking them into these systems.
DeFi programs have an impressive level of participation and price growth. This has been more than apparent in the last three months, along with what many experts are calling the alt season. This period saw small tokens with a meager market cap quickly grow in price. This too fuels the growth of the bitcoin network no matter how users want to approach the process. For example, anyone wanting to trade in a particular small altcoin will likely first get their hands on BTC. This can be done through digital exchanges that offer the chance to convert fiat currency, like USD into crypto.
Soon, PayPal will be one of the fintech providers that will allow the very same. Once they have BTC, they can get any altcoin they want to get engaged with. Thus, the alt season is also supporting not just DeFi programs, but also bitcoin indirectly, which is more than valuable for the same cryptocurrency. With this setup, even though these apps and networks are not directly linked to bitcoin, they are all good news for it.
While the DeFi boom clearly brought many advantages and benefits for the entire crypto domain, it also came with some important risks. The level of volatility in the market remains huge and like always, it has the potential to rain destruction to anyone looking to make money through yield farming.
Also, many dapps and blockchain systems that utilize altcoins as their bedrock proved to be very vulnerable to determine malicious attacks. Over the past couple of years, there have been many such attacks which left the users without their funds and no mechanisms to either insure them or try to get them back. Counting that none of these systems has that problem would be madness – just the level of growth they are seeing suggests that they are improvising as they go along.
This certainly includes security and it would not be a big surprise to see that many are simply winging it. At the same time, the growth of market cap is making them more and more attractive to attackers. However, like with esports and many other fast-growing businesses, it looks like the users are willing to take on the risks. Analysts and experts are just hoping that they are also clear on what these risks are in the present moment.