Recent research indicates that this year’s highest performing decentralized finance (DeFi) tokens are still dumping as farmers flee to safer assets.
The DeFi exodus appears to be continuing despite recent total value locked records set across various platforms. This suggests that farmers are ditching highly volatile and inflationary governance tokens for lower-risk assets such as Bitcoin, wBTC, or even Ethereum.
A recent report by IntoTheBlock has observed a divergence in DeFi token prices and protocol metrics. The latter is still bullish with near-record levels of collateral lockup, currently at $11.5 billion, whereas the token price situation looks grimmer.
Top DeFi tokens have crashed as much as 50% since September. This drop sheds light on the downside of yield farming as holders take profit and DeFi shows signs of still being a nascent market.
— intotheblock (@intotheblock) October 27, 2020
DeFi Tokens Tanking
The report looked into the price declines of a number of governance tokens from the top DeFi protocols including those from Compound, Yearn Finance, Curve, and Balancer. These protocols’ native tokens have all declined over 50% in the past two months.
Conversely, the total crypto market capitalization has increased by around 7% since Sept 1, moving above $400 billion for the first time since April 2018. DeFi tokens represent just a tiny fraction of this total, around 1.39% according to the research.
The study didn’t make any mention of the raft of DeFi clone tokens such as SUSHI, SWRV, and BZRX which are down as much as 90% from their all-time highs earlier this year.
It did state that stablecoins and tokenized versions of Bitcoin have managed to continue growing in terms of market capitalization. The amount of BTC tokenized on Ethereum is currently at record levels of 148,000 BTC worth $2 billion at today’s prices according to BTConEthereum.
Safe Haven Appeal
The reason for this shift, according to Deribit Insights’ Lucas Outumuro, is a transition to a ‘risk-off environment’ as investors took profits and became wary of high supply inflation for tokens in a sector that is still emerging.
Another factor could be the rampant yield hopping that has been clearly evident from the hordes of farmers, switching their funds from protocol to protocol in search of the next quickest buck. DeFi fatigue appears to have set in, especially now that Bitcoin has surged to its highest price in more than a year.
The report concluded that the DeFi sector is shifting from frenzied unsustainability to a more protocol-driven approach;
“Ultimately, yield farming is transitioning from enticing anyone providing liquidity with unsustainably high rewards, to a more methodical approach rewarding those that actually create value to DeFi protocols.”
Despite the collapse in most DeFi token prices, the industry still has a lot of room for growth, especially when more Ethereum scaling solutions become available.