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Total Value Locked (TVL) is not the most important metric in DeFi

Posted by
Ilya Abugov

Dapp Digest | Week #30 | by Ilya Abugov

DeFi continues to make headlines with the gaming sector maturing in the wings. The budding excitement is quickly gaining ICO-like overtones. We are starting to see the “everything needs a token” dynamic, which may start to shift focus from project utility to speculation around the underlying asset prices. While the opportunity to make a quick profit may attract retail users, it is important to remember the reality underscored by the more cautious voices: “This is all a beta test”.

How big is the sector really?

A recent Q2 Report from eToro and The TIE highlighted the cautious optimism that is imperative in approaching the current DeFi surge. An important point made by the report was that DeFi still has a very small user base.

According to Momin Ahmad of Credmark, the leading crypto credit data firm, “DeFi’s popularity and perceived success are largely due to the rate at which new products come out. Every quarter since the ICO boom, there seems to always be a new shiny toy that increases locked value, inspires hundreds of tweets, and dozens of news articles. Starting in 2019 we saw dYdX launch, then saw Makers’ MCD launch followed by a growing variety of allowed collateral for MCD, followed by Perpetual BTC contracts and now yield farming with COMP and BAL tokens. Meanwhile, the unique addresses using these protocols, while showing growth, is still nowhere close to a point where one could say DeFi is anything but a private club.” Source:  The Tie Quarterly

In fact, the report underscores stable coins as being a more prominent crypto use case at the moment.

We have seen this in our data, particularly when analyzing the contribution to transaction volumes by top addresses.

So while the industry may be focused on TVL metrics we can see that a few whale users can create the illusion of activity.

The focus turns to management

Still, while it is debatable how fast things are moving, the industry is growing and that brings up new challenges. With the growing complexity of the DeFi stack management tools are needed. Products like yEarn.finance, which help optimize asset allocation for maximum yield, are now likely to see more demand. Couple this with a governance token and don’t be surprised if you see prices for the asset balloon.

Others like Akropolis, focus on more traditional style asset management. The project which has integrations with many of the popular DeFi dapps like Compound, Aave, and Curve, has released a beta of its Delphi product and expects a full launch in August. As you may have guessed, the project will have a governance token and a liquidity mining initiative.

Decentralized asset management projects, like Melon, have so far received very little attention. So, it will be interesting to see if they will start to get some residual interest from the DeFi spotlight.

However, it is important to remember that decentralized solutions require some basic understanding of blockchain infrastructure. As such wallet tools will become increasingly more important in the management process. As wallet solutions like Argent, Exodus, and Coinbase Wallet improve integration with DeFi dapps, retail users may appear in greater numbers.

More liquidity and more risk, please

Lack of liquidity and over-collateralization are two big roadblocks that stand in the way of DeFi gaining some practical utility. Let’s assume you want to open a business, and you need a USD 10,000 loan. If you need to deposit USD 15,000 worth of collateral in another currency (EUR, GBP, JPY) the loan would likely make no sense for you, and you would either have to search for an alternative or not open the business.

Teller, having recently raised USD 1 million, strives to introduce credit scores and under collateralized loans to the DeFi ecosystem. While some proponents may argue that DeFi is revolutionizing existing financial concepts, others may say that it is simply optimizing them. As such, it is important for DeFi entrepreneurs to not ignore the lessons of traditional finance, otherwise, they may end up repeating them.

In the meantime, KeeperDAO will try to help address the ever-pressing need for liquidity. If you were wondering, yes, this project will also have a token.

The appetite for risk has made it seem like the DeFi sector is approaching the gambling space. Now you can bet on the market capitalization of DeFi on Polymarket. This is a worrisome sign. When attention shifts from utility to price, speculation can overtake reason and undermine the short-term foundation of growth.

Others are playing catch up

With Ethereum gaining a lead as a dapp network thanks to its DeFi ecosystem, competing layer one protocols are trying to follow the trend. Tron has been one of the most active players on that front. It announced the expected launch of its own version of Uniswap, and it appears that yield farming will also join the yield farming trend.

Ethereum will see the launch of yet another Ethereum 2.0 testnet, as it moves closer to the much-anticipated launch. It is important for Ethereum to prove it can successfully deal with the scalability issues. As our recent report highlights, DeFi dapps show tremendous growth, but they may not be locked in into Ethereum. For example, Avalanche recently announced that it raised $42.5 million in its token sale, as it aims to launch a high scalability network that supports EVM. EVM compatible networks that offer high transaction throughput and lower fees may start to be more enticing to dapp developers if Ethereum stumbles.

Game developers are adapting

The key trends surrounding gaming have been play-to-earn and token sharding. Both of them revolve around monetizing game assets and indirectly gamers’ time and effort. The leader in this area has been Axie Infinity, and they have recently taken another step forward. After partnering with DigiX, Axie Infinity will incorporate gold-back tokens for in-game rewards. Other games are also looking to shift focus to play-to-earn. Now Dissolution looks to embrace the model.

The collectibles space is also growing and now Dapper Labs has announced that it will be launching licensed Dr. Seuss blockchain collectibles. If this trend continues to pick it will not be surprising to see big franchises come knocking.

Still, as was iterated earlier, blockchain-based projects are not polished products. Issues constantly pop up, making the industry a rather volatile space. Recently, Niftex (See our dapp of the week review), which gained popularity fractionalizing NFTs, paused all transfers after a vulnerability was uncovered.

While it is encouraging to see Niftex act quickly to try to resolve the issue, the matter still highlights the fact that these products carry a lot of risks.

Regulators may be conflicted

It appears that the SEC Commissioner Hester Pierce disagrees with the outcome of the Telegram saga:

Last month’s settlement was the unsatisfying culmination of an enforcement action that I did not support from the beginning.  Telegram had built an operational network, made good faith efforts to comply with the federal securities laws in raising funds to build that network, and engaged extensively with the SEC staff.

It may be that the SEC wants to be more open-minded and accepting of the crypto economy, and that could be encouraging, especially for the DeFi projects who have issued or are thinking of issuing native tokens. However, the ruling was not in favor of Telegram and that appears to have put an end to one of the most highly anticipated projects in the industry.

Moreover, governments may start to look more and more into monitoring blockchain activity. With news that a Pentagon investigative unit is looking into crypto transaction analytics, the debate between private and transparent transactions may once again come to the forefront.

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