Hype-driven bubble: big correction shows DeFi tokens are overvalued

Mark Watson (Flickr)

The DeFi sector continues to grow in popularity and has especially seen rapid growth in 2020. Numerous DeFi-related assets such as Chainlink, LEND, and MKR have managed to earn the attention of a significant number of crypto investors, thereby, propelling these digital assets to record highs. 

However, the crypto markets appear to be headed into correction seasons, following several weeks of substantial gains. Bitcoin and Ethereum, along with other assets in the DeFi Ecosystem and the crypto market in general, have taken a bit of a hit. 

DeFi’s Initial Pump And Subsequent Dump

The DeFi sector had experienced a heavy boom since the beginning of the year and especially within the last couple of months, up until just a few days ago. As at earlier this month, there was a record of over $9 billion locked in the DeFi markets, an impressive 700% boom from the records from early June. It is extremely astonishing to see how much ETH has been locked up in DeFi in a considerably brief period of time.

However, the past few days have been trying times for cryptocurrency markets in general, and DeFi in particular, as it sees its first major correction. At the time of writing, the total value locked (TVL) in Defi, according to DeFi pulse, is $7.8 billion, a 22% downward slide from the $9.5 billion recorded on the 2nd of September. 

Total value locked in DeFi (DeFi Pulse)

 

The drastic drop in the Total Value Locked (TVL) of digital assets locked in DeFi, coincides with the market sell off that saw Bitcoin fall from $12k levels to retest $10k. One logical theory as to this fall in Bitcoin is its correlation to the stock market which has also experienced considerable losses in the past week. BTC’s drop could be reflecting a drop in traditional stock prices.

READ ALSO: What is DeFi? The Complete Guide to Decentralized Finance

Also, Ethereum, the backbone of DeFi, was equally impacted by the fall of bitcoin, due to its correlation to BTC. Consequently, the drop in ETH’s price also seems to have spread to other assets in the DeFi ecosystem. 

The SushiSwap Debacle

Beyond possible correlations with BTC and ETH, price drops in the DeFi tokens might have a very big connection with the recent events connected to SushiSwap.  This would include an alleged exit scam of a one-week old project and the hand over of admin function.

Sushiswap is a decentralized exchange protocol that works without an order book. It is a fork of Uniswap although unlike Uniswap, it includes a token, “SUSHI”. 

Chef Nomi of Sushi has admitted via a thread on Twitter, to having sold his SUSHI bag for approximately $11 million in Ethereum.  He stated in the tweet that he did it for the community. Also true to his words, he has made a move to transfer admin control of SushiSwap to FTX and SBF CEO, Sam Bankman-Fried. 

The SushiSwap debacle might have hastened the sudden exit of investors from the DeFi space, as yield farmers most likely concluded it was time to exit in order to save their profits. 

Should We Expect Another Bull Momentum Or The Burst Has Happened?

Beyond the earlier stated points, price drops in the DeFi token space appears to be the result of price corrections that have been anticipated for quite a while. Clearly, it looks like DeFi markets have possibly entered some kind of an inflection point, though, in the future, further growth and additional corrections are definitely expected.

The recent downslide of the DeFi market is a strong reminder that while DeFi is incredibly exciting in the long term, it is still very much in the early experimental phase. Greater returns may mean even greater dangers in DeFi as several of these projects are still uncertain, carrying collateral and volatility risks with them.

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