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Yield farming calms as project development regains focus

Posted by
Ilya Abugov

Week in Review | #42 | 2020

There is growing sentiment in the market that the time for yield farming debauchery is over, and project development and adoption should regain focus. The hype has subsided, but “degens” don’t want to give up on the enormous yields that were sprouting out of nowhere during the summer months. 

At the same time investors who missed the boat, are rushing to play catch-up. CoinGecko shows the DeFi market capitalization at over $14.2B with over $2.6B trading volume. This is no longer just a niche space. There is a sense of tension, but the industry continues to move forward.

The voting question

Decentralization was supposed to remove unnecessary intermediaries and give power back to the users. However, theory and practice can greatly differ. The reality of the situation is that dapps implementing DAO often descend into centralized arrangements.

Key stakeholders amass significant enough stakes (through accumulation or delegation), that they are free to push through whatever proposals they see fit. The latest example of this is Dharma’s proposal on Uniswap.

The proposal seeks to change the quorum meaning, which if passed would mean that the top two delegates Dharma and Gauntlet could achieve quorum on their own. The next delegate by importance appears to be Andre Cronje, another major figure in the industry. So, after all the song and dance around decentralization, all of the major decisions for one of the key protocols in the biggest DeFi ecosystem will be made by 2 centralized entities and a whale?

The situation goes to show that a blockchain is a tool, not a cure. Centralization is a result of user behavior. Blockchain technology affords the community the ability to enable decentralization, but users continue to revert to their previous behavioral patterns even with the new opportunities.

Rivals continue to play catch up

The one advantage of competing projects always seem to have over Ethereum is money. Given the fact that startups need financing, many developers may be expected to go where the money takes them.

Private investors have activated and a multitude of projects have received funding to build projects on Ethereum, but development funds of big rivals may pull away enough dapp projects nonetheless.

Now Algorand has set up the Algorand Europe Accelerator, which will support individual projects up to $500K. Binance, which is growing its influence in the decentralized space has announced investments into 6 DeFi projects stemming from its $100M fund.

Moreover, Binance has announced that the Panama Bridge Service will support MetaMask. It appears as if the crypto major looks poised to try to steal away developers and users from Ethereum.

In fact, DeFi continues to attract networks, even those traditionally associated with different sectors. For instance, Vechange, a recipient of the VeChain Foundation grant, recently launched on VeChain. The project is a DEX, and it will be curious to see if the ecosystem starts to further mirror dapps in the Ethereum DeFi space.

Degens being degens

Andre Cronje launched another “live test” experiment, looking to address the issue of impairment loss. While the launch was accompanied by a warning not to put funds in, that did not stop the overeager from doing just that.

Despite the recent debacle with the EMN token, the DeFi community continues to throw caution to the wind. At the same time, when things go wrong, at least part of the community is quick to blame the developers.

This dynamic is bound to create friction, and we are already seeing some edgy humor from developers and founders, for example, Molly Wintermute. While some are working to create others are just looking for profits. DeFi has become the new magnet moniker, even though as surveys show, people don’t even necessarily understand what it is.

The tension this is causing may have a long-term negative impact on the industry. The strength of the industry comes from its community stance. It is seen in the open-source nature, in the eagerness of projects to partner up and cooperate, and the general attitude towards sharing ideas. If the negativity around degens’ attempts at quick profits continues to mount, it may start to erode the good nature that was built up over the years.

The regulatory shadow

While the industry has been trying to evaluate what the BitMEX story means for DeFi, regulators added something else to consider. SEC Commissioner Hester Pierce mentioned during a speech that the DeFi governance tokens could potentially be classified as securities.

On the surface, this is nothing new. However, there haven’t been a lot of comments coming from the SEC regarding the DeFi sector, and so this may serve as a starting point for a forming stance by the regulator.

It can be argued that much of the value of the governance tokens is based on the assumption that platform fees will eventually be distributed to token holders similar to how a dividend is distributed to company shareholders. This sentiment coupled with speculative activity growing in the space may sway regulators.

If that were to happen, it would undermine the value of much of the DeFi sector and have a negative impact on the industry, similar to how regulatory action curtailed the ICO boom. However, given the uncertain macroeconomic situation around the world, the regulators may not want to stymie a growing segment of the economy.

Newsletter

NFT gain power and standing

While the DeFi sector searches for direction, NFTs are growing with the excitement of a budding segment. As the State of the Blockchain Game Sector report for September points out, fees on Ethereum are starting to subside, and it will be important to see if the sector recovers after the devastating first three quarters of the year.

Interestingly, it looks like the gaming sector leader on Ethereum, Axie Infinity, enjoyed a nice boost from Mystic Axie NFTs being acquired by Delphi Digital. The concept of NFTs attracting attention and increasing engagement may be something other dapps may look at trying. In fact, Aavegotchi has already brought the concept to DeFi.

While sales volumes may not be growing quickly on the NFT marketplaces, AUW counts are growing rapidly. Some of that may be due to Rarible’s governance token distribution model. The marketplace now shows more AUW than the top marketplace by volume, OpenSea. However, given that some NFTs now go for more than $10,000 it appears that interest in the space looks to be growing.

Developments in the DeFi space have shown that one project launching a governance token with a liquidity mining token may catalyze the rest of the sector to do it. Some have speculated that the launch of SushiSwap, forced Uniswap to release UNI.

Now with Rarible creating serious competition for OpenSea, and smaller marketplaces looking to attract attention, it would not be surprising to see other governance token launches occur in the space.

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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