Decentralized finance (DeFi) seems to be going through a very difficult time. Is it too much to say that DeFi has almost disappeared?
Decentralized finance, commonly known as DeFi, was (and is) one of the greatest promises in the world of cryptocurrencies and blockchain. In recent years, it has received considerable attention from investors, the media, and technology enthusiasts. However, in recent times, it seems that DeFi is going through a critical phase. The title of this article, deliberately provocative, for better or for worse, expresses a doubt that many interested in the crypto sector are asking themselves. To put the question in other terms: "Shouldn’t DeFi have replaced traditional finance, in the sector known as TradFi?"
With the collapse of Bitcoin, interest in the world of decentralized finance has slowly disappeared, but this does not actually mean that the sector has not taken steps forward. Therefore, faced with the immense quantity of variables to consider to answer these questions, all that remains is to try to read between the lines the underlying direction of this alternative way of doing finance, with a critical approach.
What is happening to DeFi?
In September, the total value of funds locked on DeFi fell to new lows, reaching the threshold of 44 billion dollars. Economic activity also seems to be proceeding downwards, with a contraction measured by the various tools on the market of approximately 15%. Among the studies currently most discussed by the sector is that of VanEck, which highlights a contraction in activity linked to decentralized finance, measured by the volume of trade. This evidence was proposed by their analytical tool MarketVector Decentralized Finance Leaders Index (MVDFLE), based on the activities of the most liquid tokens on the market. In August, the total locked value (TVL) for August fell by 8% and traders are eagerly waiting to monitor the figure for the close of September.
In addition to an unattractive market, due to the extreme compression of the volatility of Bitcoin (BTC/USD) and Ethereum, which was reflected in the rest of the Altcoins, what makes the crypto segment even more "boring" is the trend of traditional finance, "the bitter enemy" of decentralized finance. The data speaks for itself: the increase in expectations on interest rates on Free Risk securities of the so-called TradFi (e.g. US Treasuries and European Bonds), with Nasdaq and the S&P500 in bullish direction (mainly thanks to the "AI bubble") is causing a capital flight from the crypto market, which mainly plays to the detriment of the sub-segment of Defi. The stablecoins, which in the phase of practically negative debt yields often yielded double-digit figures, have lost their attractiveness, triggering this negative-recessionary spiral that seems to work against DeFi.
Is DeFi officially dead?
Absolutely not, and many protocols are continuing to grow and introduce interesting new features for their users and fans. There is a lot of news that should make DeFi supporters rejoice with investments in the sector in constant progression and in any case "positive", such as the new capital contributions proposed by Blockchain Capital, for a total of 580 million dollars to be allocated to various sub-segments of the crypto landscape.
However, the blindness of some extreme DeFi supporters in predicting the market’s growth in just a few years should be put into question. The long-awaited "salvation" from the evil world of "TradFi" has not and probably never will turn into reality. DeFi now looks more like just another way of doing finance, especially considering the euphoria surrounding the launch of new spot ETFs by financial giants like BlackRock.
The popular adoption of Bitcoin through instruments such as passive mutual funds would lead to a major inflow of capital, with the likely consequence of an appreciation and stabilization of the price of many decentralized financial instruments. At the same time, this enthusiasm should perhaps be tempered for a moment by all those who were blind supporters of DeFi, because these ETFs would probably not play a positive role at all in the financial "decentralization" of the sector.
In short, defining decentralized finance as "dead" or "almost disappeared" is truly excessive, even if the data highlights a substantial migration towards other types of investment vehicles. It is important to note that even though DeFi has gone through a rough patch, many projects are still working hard to improve the security, usability, and regulation of the industry. One of the main challenges DeFi faces is finding a balance between the openness and transparency of the industry and the need for regulation.
Original article published on Money.it Italy 2023-10-07 07:50:00. Original title: Che fine ha fatto la DeFi?
