Liquidity mining is over, but DeFi is just beginning

Bitcoin has broken through its 2020 all-time high, and a number of mainstream currencies are also recovering, but the price of DeFi projects has not improved since the plunge in September. The market's confidence in DeFi mining coins is increasingly insufficient, and there are many voices saying that DeFi is over.

So, is DeFi really dead?

Although most of the liquidity mining projects in the market are currently facing the dilemma of liquidity depletion, thin business volume, loss of old users and lack of new users.

If these problems cannot be effectively solved, DeFi may indeed be doomed to death.

But for now, it seems a bit premature to say that DeFi is dead...

At least from the data, DeFi is not dead yet

The recent sharp drop in DeFi mining coins has caused many investors to lack confidence in the future development of DeFi.

Some people believe that during the liquidity mining boom, the DeFi bubble was seriously inflated and the market value was inflated. Now that most currencies have reached their highs, they will enter a long period of "value return"; others believe that this round of market conditions has fully demonstrated the potential of the DeFi field to the market, but DeFi is still in its early stages of development, but there is hope for the future.

One side believes that DeFi is already an octogenarian, while the other side believes that DeFi is a newborn with immeasurable future. It seems that neither side can convince the other.

What is the current situation of DeFi? Perhaps we can get a glimpse of it from the data.

First of all, the most intuitive thing is Ethereum's Gas fee.

Image source: The Block

The above picture shows the average Gas fee for each transaction on Ethereum in the past three months. When liquidity mining was the craziest, the average Gas fee was as high as US$9. As the mining enthusiasm declined, the Gas fee gradually decreased.

According to data from the indicator website BitInfoCharts, the average transaction fee for Ethereum in October was around US$1, which is a far cry from the highest price of a single Ethereum transaction in September, which was US$14.583.

For DeFi players, the most intuitive impression that DeFi brings to them, in addition to the excitement of high risk and high returns, is more about the congested Ethereum network and high transaction fees.

The fees paid for Ethereum transactions are paid to Ethereum miners, who expend computing power to process transactions. When the demand for miners' computing power is greater than the supply, Ethereum transaction fees increase.

This is because when many people need to process transactions at the same time, miners will prioritize those with the highest bids, which also pushes up Ethereum's transaction fees. Conversely, when the network is not too busy, or when there are enough miners to process the supply, fees will drop.

The reduction in gas fees is largely related to the gradual decrease in DeFi transaction volume based on the Ethereum network.

Behind the real trading volume is the real market sentiment.

Compared with the past, the market is indeed less optimistic about DeFi.

Secondly, we should also look at the trading volume of the Dex track.

Image source: defiprime

In September this year, the transaction volume of decentralized exchanges (DEX) exceeded US$25.5 billion, setting a record high, of which Uniswap's transaction volume accounted for as much as 75%. Thanks to the issuance of UNI tokens, Uniswap's transaction volume in September successfully surpassed Coinbase, second only to the three major domestic exchanges.

However, the good times did not last long.

According to data from the Dune Analytics platform, weekly DEX transactions peaked at $8 billion on August 31, and then reached a monthly high of $6 billion on September 14. However, the latest data shows that as of October 12, monthly trading volume has fallen below $3 billion.

FTX founder SBF pointed out at the Los Angeles Blockchain Week that the daily trading volume of DEX on Ethereum plummeted in October because liquidity mining no longer provided incentives.

Coincidentally, Johnson Xu, head of research at Huobi DeFi Labs, once said that the current decline in trading volume on decentralized exchanges is caused by a variety of factors, but one of the main reasons is that people are not able to earn so much profit now. "

The reduction in incentives has led to a decrease in trading activity on decentralized exchanges.

But it is worth noting that the amount of funds locked in DeFi smart contracts has not decreased much.

In addition, the changes in the amount of BTC on Ethereum have, to a certain extent, become a barometer of the popularity of DeFi.

As DeFi becomes more and more popular, people are injecting funds into DeFi in various ways.

Mapping BTC is one of the methods.

On the Ethereum network, the development of DeFi is also positively correlated with the number of anchored BTC.

The largest one at present is WBTC. On DeFiPulse, the current locked volume of WBTC has reached 1.5 billion US dollars, surpassing Compound to rank third, second only to Uniswap and Maker.

Currently, there are nearly 150,000 BTC on Ethereum, accounting for 0.694% of the total BTC and 4.26% of the Ethereum market value. As can be seen from the above figure, the total amount of BTC on Ethereum is still increasing, with the fastest growth period at the end of August. The current growth rate is slowing down. Recently, renBTC has even shown a decreasing trend.

Image source: Dune Analytics

The reason for this phenomenon may be related to the recent trend of Bitcoin.

Since September this year, the price of Bitcoin has begun to rise gradually.

In the past two months, the price of Bitcoin has risen from around US$10,100 to a high of US$13,816, an increase of more than 35%.

In contrast, the DeFi project Harvest suffered a hacker attack, and the price of FARM coin plummeted, causing heavy losses to miners who mined by mapping Bitcoin single currency.

In other words, to some extent, the return on simply holding Bitcoin is already higher than the income obtained from staking Bitcoin for liquidity mining.

The recent slowdown and decrease in the number of mapped Bitcoins also shows to a certain extent that DeFi mining is no longer as attractive to users as before.

Finally, let’s look at the amount of locked funds (TVL) in the DeFi market.

In the DeFi market, the amount of locked funds is the most common indicator used to evaluate the growth of a DeFi project. For a project, the amount of locked funds in the liquidity pool represents the liquidity of the project.

The more locked-in tokens there are, the better the liquidity is, and the more dynamic the entire project is. Otherwise, it means that the project will be delayed in development or even die.

Although some investors in the market have expressed objections to the accuracy of using locked-in volume as a measure of project valuation, overall, this indicator still has certain reference value.

In August this year, the locked-in amount in DeFi projects was once linked to the token price, and the increase in the project's coin price and the locked-in amount of funds were often positively correlated.

Image source: DeFipulse

The above picture shows the changes in the overall locked volume in the DeFi market over the past year.

We can see that the DeFi lock-up volume has accelerated since the end of June. At that time, COMP was born, which ignited the DeFi craze. After that, YFI, YFII and other liquidity mining emerged in an endless stream, attracting a large amount of funds to enter the market.

We see that although the amount of funds locked in the DeFi market has slightly retreated in September and October, overall, there is still a lot of money left in DeFi.

It is obvious from all the data that the popularity of DeFi was much higher at the end of August and the beginning of September than it is now, which may be due to the liquidity mining craze at that time. Now, the market was too hot some time ago, and after the craze, it was a mess. At least the peak of liquidity mining has passed, and the Fomo sentiment has also cooled down.

Various data show that it is too early to say that DeFi has died down. However, compared with the previous craze, the current DeFi is gradually returning to rationality.

DeFi currently has many problems

Although DeFi is not yet cold, it does not mean that DeFi can complete a "soft landing" from enthusiasm to rationality.

DeFi itself still has many problems that need to be solved.

For example, mining coins plummeted and there was no sustainable capital inflow.

Previously, all major DeFi currencies rose across the board when the market was good, and tokens such as YFI, YAM, SUSHI, and UNI have all ignited market sentiment.

However, happy times are always short-lived. These currencies are now down 68.92%, 82.24%, 91.01%, and 57.93% from their highs, respectively.

After the carnival, everything is in chaos.

In addition, in early September this year, Sushiswap, which almost emptied Uniswap in one fell swoop, collapsed, triggering a drop in the prices of coins such as Pearl and Kimchi. Coupled with the high gas fees on Ethereum, the yields of many mining projects are far lower than before. Even some users with smaller capital cannot cover the costs through mining income, forcing them to withdraw funds from the liquidity pool.

For the project, after the funds in the liquidity pool flee, there is neither sustainable capital inflow nor considerable business support, so a vicious cycle occurs, and farmers gradually come to a tacit understanding: to mine new funds instead of old ones.

Funds from old projects are fleeing to new projects, and new funds entering DeFi will not choose old projects.

The end result is the depletion of the liquidity pool and the collapse of the project.

Ironically, in the current DeFi market, it seems difficult to come up with a more innovative way to play besides liquidity mining.

Due to the lack of innovative gameplay, the life cycle of new projects is getting shorter and shorter.

As mentioned above, for a liquidity mining project, when the liquidity in its pool is exhausted, the project is not far from being declared dead.

At present, most projects in the DeFi field are borrowing the gameplay of early liquidity mining such as YFI and YAM, and even NFT model projects such as MEME are not immune.

In addition, users have a high psychological defense against new mines, and will withdraw their funds immediately if something goes wrong. Therefore, many new mines collapse faster and faster, and there are many projects that reach their peak as soon as they are launched.

In addition, constant hacker attacks are also one of the difficulties encountered by DeFi.

In the blockchain world, especially in the DeFi field, it is very common for project smart contracts to be open source. Therefore, news of open source projects being hacked is not uncommon.

Therefore, the biggest concern of users when mining is the security of smart contracts, because the funds of everyone participating in mining are stored in smart contracts. Once the contract is attacked, not to mention the sharp drop in the price of the currency, if you are not careful, you may lose all your money.

The figure below shows the statistics of DeFi projects being attacked by hackers since 2020, as reported by CryptoDiffer.

Several projects including Uniswap have lost a total of US$58.8 million to hackers. It is no wonder that everyone calls DeFi a hacker ATM.

Image source: CryptoDiffer

Among them, bZx, as a project with good early popularity and reputation, was hacked three times in a year. Its reputation declined seriously and its locked funds ranked low among DeFi projects.

What’s more, recently, Harvest, which is known as a competitor of YFI, was also seriously damaged by hacker attacks, which directly led to a sharp drop in the price of FARM and a serious decline in the amount of locked funds. In addition, the Curve token implicated by this was not immune. After Harvest was attacked, the price of CRV also plummeted.

At present, it seems unlikely to see the DeFi boom that was once supported by liquidity mining.

But the end of liquidity mining does not mean the end of DeFi’s fate.

In fact, as early as 2015, the prototype of DeFi gradually emerged, from the early MakerDAO's first iteration of its own architecture, to the initial emergence of Aave in 2017, and then to the formal proposal of the DeFi concept on Medium in 2018.

DeFi has a history of more than 5 years.

During the long five years, DeFi has been in obscurity for most of the time.

Despite its obscurity, DeFi is slowly gaining strength.

From 2015 to 2019, the DeFi protocol has gone from exploration in its unknown era to the maturity of its application scenarios, paving the way for this year's explosion.

However, the outbreaks are always short-lived.

Perhaps after the explosion of DeFi, it will return to a long period of calm.

For users, although DeFi will still be profitable in the future, the possibility of reproducing the frenzy since June this year is very small, at least in the foreseeable future.