Observation | Who will burst the DeFi bubble?

Source: Mars Finance

Author: Liang Yushan

Defipulse data shows that from March to date, the amount of DeFi locked has surged from US$550 million to US$8.4 billion, an increase of 1,427%.

As the DeFi market soars, more and more developers have begun to create various MEME-based protocols and name their tokens after food (such as YAM, SUHSI, PASTA, and KIMCHI, etc.), and these protocols have also attracted millions of stakes within hours of going online.

Although developers have warned that the project's smart contracts have not been audited, users are still willing to invest large sums of money in it to profit through the liquidity mining mechanism.

According to Cryptopotato, relevant data shows that the DeFi market is currently showing bubble-like characteristics, and four factors may curb its further growth:

1. Smart Contract Vulnerabilities

In the past few weeks, DeFi protocols such as Yam Finance, Spaghetti Money, SushiSwap, and Kimchi Finance have attracted billions of dollars in assets due to the influence of MEME. In addition to being popular in the crypto community, these protocols have one thing in common: they are unaudited.

This means that without a third-party audit company or team to verify the smart contract code, investors face huge market risks. Yam Finance is an example. According to Mars Finance, the protocol smart contract was unaudited and had loopholes, causing the price of the token YAM to fall by more than 90%.

“A coding bug in a smart contract on an unaudited protocol could drain millions or even billions of liquidity, which could be catastrophic for the DeFi space.”

2. Hacker attacks (need to be taken seriously)

The best way to predict the future is to study history.

“In April this year, hackers attacked the DeFi protocol dForce, causing it to lose nearly $25 million. Imagine how much investors’ assets would be lost if a protocol like SushiSwap was hacked. You know, the total value of the protocol locked up is over $1 billion and it is completely unaudited.”

“Hackers have always been an important factor threatening the security of the entire cryptocurrency market. Unlike centralized trading platforms such as Coinbase, BitMEX, and Binance, which have insurance policies and will properly protect user assets, most of the popular DeFi protocols are completely anonymous and unprotected. We don’t know who is behind the source code, let alone consider insurance methods. This is the main reason why the protocol comes with a disclaimer.”

3. Ethereum transaction fees

Most DeFi-related transactions and operations occur on the Ethereum network, which drives gas prices up continuously and causes DeFi to gradually evolve into a “rich man’s game.”

“Investors have to pay $50 to $120 in fees for simple staking operations, which will inevitably make retail investors unprofitable and leave opportunities for those with large amounts of capital to earn high returns.”

4. Bitcoin price fluctuates greatly

As the crypto asset with the largest market capitalization, Bitcoin's influence cannot be underestimated.

In the past few months, mainstream crypto assets have lost their dominance in the market, replaced by a large number of DeFi tokens and altcoins. However, according to the past development trajectory of the market, when Bitcoin rises strongly, the entire market will follow. For example, in December 2017, the sudden surge in Bitcoin prices triggered FOMO sentiment among retail investors.

For some investors, there is a certain threshold to enter the DeFi world, but there is basically no barrier for them to buy BTC. Ordinary people can get BTC in many ways and push its price to a record high.

Conclusion

Overall, the DeFi market is currently booming and shows no signs of slowing down. However, most DeFi protocols are unaudited and have certain risks, so investors need to invest with caution.

In addition, as Huobi Global CEO Weng Xiaoqi (Qi Ye) said when he was a guest on "Mars Video Live", "The current DeFi market bubble is very large, and many projects have obtained huge valuations without forming barriers. Therefore, the current market sentiment is similar to that in 2017, with strong speculation."