The rise in COMP token has been extraordinary. The total market capitalization of Compound expanded to nearly 7 times that of MakerDAO.
The explosion in the Compound DeFi project has caught the attention of the entire crypto markets. The total value locked in DeFi has surpassed $1.5 billion, which Compound taking over MakerDAO’s top position with $562 million locked in.
Nevertheless, the suspicions are the sustainability of the bull markets keep on rising. Mati Greenspan, financial analyst and founder of Quantum Economics tweeted,
This hardly seems sustainable… The difference between many DeFi projects and a bank is that banks take a risk to create value.
Borrowing in one coin while using another as collateral seems exciting but the risk is on the user and no value is created.
Reminiscence of 2017 ICO Bubble on Ethereum
The ICO bubble inflation was due to the excess pricing of future projects based only on euphoria and a whitepaper. The returns and growth of the DeFi space seem to be headed out a similar path.
Ari Paul, CIO and Managing Partner at BlockTower Capital tweeted,
3 years ago, an much much younger version of myself expounded on the basic risks of investing in cryptocurrency. The 2020 version would need to talk about multi-platform defi game theory attacks and problems with the infinite recursion yield mining model.
The risks of DeFi investments are borne by the investors in the token and the liquidity providers alike.
Bitcoin and Ethereum
The DeFi bubble and handsome returns are fueled the massive liquidity injection. The success of the platform will depend on the volume of the actual business, security, and repayment by borrowers. Nevertheless, according to leading analysts, this could lead to a bull run in the top two cryptocurrencies.
Independent crypto analyst and trader, Light, tweeted,
Positive market sentiment is fertile soil for the future promise narratives that story assets like ETH thrive in. The recent DeFi bull market will implode shortly and feed into ETH.
As reported earlier on CoinGape, Ethereum on-chain transaction fees have surpassed that of Bitcoin. Reportedly, 89% of the fees are coming from non-ETH transfers but from smart contracts on Ethereum (primarily stablecoins and DeFi projects). Hence, there is reason to believe that a blowout of billions in projected value could be bearish for the entire crypto markets.
However, there is also a strong possibility of the liquidity exiting into Bitcoin [BTC] and Ethereum [ETH]. The gains from the rise in the top DeFi projects are also likely to be stored on Bitcoin and Ethereum in the short-term. Crypto traders and analyst, Theta Seek (alias), tweeted,
>$500 mln in market cap was created in the last 5 days for $COMP. Given the negative funding rates on @FTX_Official, I assume that these guys are not looking to HODL $COMP but more towards locking in yields. Expect a small pump in #ETH & #BTC when it all comes crashing down.
How long do you before stability and end of irrationality in the DeFi-based cryptocurrencies? Please share your views with us.
Disclaimer The views, opinions, positions or strategies expressed by the authors and those providing comments are theirs alone, and do not necessarily reflect the views, opinions, positions or strategies of CoinGape. Do your market research before investing in cryptocurrencies. The author or publication does not hold any responsibility for your personal financial loss.
Nivesh from Engineering Background is a full-time Crypto Analyst at Coingape. He is an atheist who believes in love and cultural diversity. He believes that Cryptocurrency is a necessity to deter corruption. He holds small amounts of cryptocurrencies. Faith and fear are two sides of the same coin. Follow him on Twitter at @nivishoes or mail him at nivesh(at)coingape.com