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TVL, prices and the question of growth

Posted by
Ilya Abugov

Dapp Digest | Week #35 | Ilya Abugov

DeFi just keeps getting bigger. As comparisons to the ICO days become more frequent the positives are fighting to outweigh the negatives in this ongoing crypto surge. Headlines are overflowing with announcements of successful funding rounds and exciting developments are happening across the industry.

However, standards seem to be deteriorating as investments start to look more and more like gambles. This, in turn, incentivizes irresponsible behavior from development teams as they try to cater to market needs. How the industry responds to this new hype cycle may determine how quickly it is able to take the next step.

When in doubt, mint a token

In the late ICO days, investors and analysts started to ask whether a project needs a token, now in the DeFi boom every appears to think “yes”.

Despite the noble cloak of decentralization, it is hard to ignore the financial component of the token launches. As FOMO appears to take over the development circles distribution practices start to look a bit dubious.

This week 1inch and Curve have grabbed headlines over this. 1inch, an exchange aggregator, has raised questions with its proposed token distribution. The project itself has garnered a lot of positive attention and has recently announced a new product Mooniswap, but by allocating only 23% of the token to the ecosystem it has invited criticism. It is also hard to ignore the return of the ICO-like pie-chart.

Source: medium.com/@1inch.exchange

Curve further demonstrated how despite goals to decentralize governance founders can wield enormous influence. At one point, the founder held over 71% of the voting power.

This is not the first time a DeFi token distribution plan starts a controversy. Last month the project that raised doubts was mStable.

The good news is that the community is vigilant and project teams appear to be responsive to criticism. Still, the evolution of DeFi token distribution over the past few months highlights the fact that the industry is regressing towards its ICO bad habits.

Meme culture, scams, and failures

The traditional financial sector is one of the most conservative areas in the modern economy. Yet, while DeFi, which is attempting to if not displace then at least take a share of the market, appears to be full of meme projects.

YAM is a prime example, a project that saw its TVL go to nearly $600M in a few days and then go back to nearly zero almost as quickly.

There does not seem to be much interest in what and how the project does. It needs to be catchy, it needs to be DeFi and it needs to be new. The story of the Degenerator and the $MEME token are an interesting example of what attracts capital in the current market.

With everyone in a rush to get to the market, quality standards fall, attention dissipates and retail users can become victims of bugs and or scams. Not only do users need to be wary of bugs in the code crashing projects, but they also need to be cautious of things like the copy-paste scam.

The good news is that the community is proactive, and at least tries to address some of these issues. For example, Fair Launch Capital looks to provide teams with the necessary financial resources to conduct proper audits.

Regulation remains a big question mark

As token valuations increase, there are more discussions regarding the potential stance of regulators on DeFi activity. With similarities to the ICO days becoming hard to ignore, some are pointing out the need for self-regulation in the industry.

It is also interesting if Aave getting an Electronic Money Institution license will motivate other projects to apply, and whether regulators will look at licensed and not licensed projects differently.

TVL

Curiously, with the DeFi sector surging, the SEC has announced that it will relax restrictions on who is allowed to invest in private capital markets. While this doesn’t appear to change things immediately, it does create a positive sentiment that the investment market will become more open. This could bode well for the crypto industry.

The sleeping giant awakens

Before its release, Polkadot was one of the most anticipated projects in the space. Now that it is active it appears to be gathering a vibrant DeFi community around itself. The project expects to see a growing number of parachains and will likely have interoperability as one of the key attractive features.

Its DeFi ecosystem already has projects like Stafi, Acala and ChainX, and it is also seeing established players like Chainlink, Celer Network, Ocean Protocol, and 0x Protocol looking to build on it.

Source: CoinGecko.com

Polkadot has been rising quickly and is already a top 5 project by market capitalization according to CoinGecko. 

Major DeFi communities are starting to emerge, with Ethereum as an obvious leader but with Tendermint and now Polkadot as competitors to watch.

Binance looking to launch a DeFi hackathon accelerator in India might be a boost for the Tendermint space.

However, with the amount of excitement surrounding Polkadot’s ecosystem, it would not be surprising to see it become one of the key challangers to Ethereum’s DeFi crown.

TVL, prices and the question of growth

Over the past several weeks DappRadar has deep-dived into the TVL of MakerDAO and Curve to highlight the impact price change of the underlying assets has on TVL. The media is filled with headlines highlighting the metric that create a perception that the ecosystem is growing at a rapid pace.

However, when the price increase is factored out, the picture looks much different. The recently launched adjusted TVL on DappRadar shows the metric with prices locked as of 90 days prior, and the difference is staggering.

Of the top 5 projects by nominal TVL only Curve has seen a relatively low level of distortion. For other projects price change has been a key factor in TVL growth, and for Synthetix it has accounted for over 80%+ of it.

That is not to say that adjusted TVL has not been growing, but it does raise the question of whether real growth is overstated. Projects are raising capital and building projects, but is there real demand?

Key here maybe the fact that another key metric AUW (active user wallets), has been plateauing since the middle of the month. So, while headlines may be suggesting a new bull market, the data warns of potential exhaustion in the market.

Crypto art is quietly growing

While all of the attention seems to be fixed on DeFi, art has been showing some life. The art sector is seeing two dominant trends – the need for more liquid markets for its items and the emergence of digitalization both as a medium and venue.

Digital art has been gaining momentum but needs solutions for addressing authenticity and scarcity issues. Blockchain can help with that. With a seemingly growing number of virtual exhibits, the crypto space should receive more attention.

To that effect, Somnium Space and Cryptovoxels are looking to support Burning Man events in their virtual worlds.

While gaming on Ethereum is hampered by high gas costs, the art sector may be better suited to continue growing in this environment. Also, given the high-value nature of the sector it would not be surprising to see it start to integrate with DeFi in the not too distant future.

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NB: The information provided here is for reference and informational purposes only. This is not investment advice and should not be treated as such.

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