DeFi apps see money leaving sector amid cryptocurrency downturn as market loses some of its lustre
- DeFi tokens are seeing large declines in value even when backed by stablecoins, which are designed to not fluctuate as much as cryptocurrencies like bitcoin
- Decentralised finance apps, which run on blockchain, could face tougher regulatory scrutiny as the sector grows
Red flags are starting to appear in what’s often been the most lucrative and volatile sector of the crypto universe this year.
The number of new DeFi user accounts opened daily has dropped to the lowest levels since the embryonic sector started hitting its stride in September, according to Nic Carter, founding partner at Castle Island Venture, who used data from Richard Chen of venture fund 1confirmation to measure the decline. For the past four days, only a few thousands new accounts were opened daily, down from nearly 40,000 in mid-May, the data shows.
This may spell trouble, since it’s the injection of new users into the system that helped DeFi investors achieve triple-digit overnight returns on tokens of apps such as Compound and SushiSwap. Many DeFi apps essentially let users lend out their coins to new users and to earn returns on the loan. If there aren’t fresh users clamouring for the coins, the yields fall.
“DeFi is going to be challenged because it relies on this injection of new liquidity, and ultimately a lot of DeFi yields are a function of new buyers supporting token prices,” Carter said. “I don’t think DeFi is going away, it just might be a less attractive place to park capital in the next few months.”
The amount of funds locked in Defi applications is already more than 40 per cent lower than in mid-May, according to data tracker DeFi Pulse. The drop to US$51 billion from US$87 billion effectively shows money leaving the sector.
Investors have been flocking to the sector because of the often instantaneous triple-digit returns seen in the past year, outstripping even the almost fourfold gains in bitcoin.
“These experiments are very interesting and very promising, but that’s still all they are,” said Gil Luria, director of research at D.A. Davidson. “Just like any category of start-ups, I would expect most of the new financial services delivered through crypto technology to fail.”
