Has Compound Kicked Off a DeFi Crypto Bubble?

Less than a week after token distribution began, COMP has surged from virtually nothing to a peak of $325 over the weekend. According to CoinMarketCap, it is the top-performing token in the top-100, powering up the charts to the nineteenth position overall.

COMP Cranking Higher

In terms of market capitalization, COMP is now larger than some previous altcoin heavyweights such as NEO, Dash, Ethereum Classic, and IOTA. The analytics provider Uniswap reports this market cap to be around $850 million at the time of press. COMP had its best trading day on Sunday with a volume in excess of $6 million. This has pushed liquidity over the $2 billion level and token prices have followed.

Investors have flocked to the Compound DeFi platform to deposit crypto assets in order to take advantage of the token distribution in addition to bank-busting interest rates. Late last week it was possible to earn 12% for Tether deposits and get some COMP on top of that. By Monday morning, BAT was the top-earning asset with a whopping 24% in interest being paid out for deposits. Even Bitcoin hodlers could make some interest by converting BTC to wrapped BTC and making a collateral deposit to enjoy an 18% annual interest yield. In terms of total value locked, Compound now has over $600 million according to DeFi Pulse, a figure that has increased by 500% since this time last week. Compound has now eclipsed MakerDAO as the most popular DeFi platform on the market with a dominance of 40%. Some industry observers have noted that MKR holders are starting to sell in favor of COMP tokens. Naturally, the more crypto that is locked up as collateral, the thinner those COMP tokens are distributed. Currently, only 2,880 are dispatched every day, split equally between lenders and borrowers. Some have questioned why Compound hasn’t rewarded its loyal users that were on the platform before the token launch,

Wouldn´t that be much better than attracting new users who are here just for short term farming?

DeFi Train Keeps Growing

The seemingly unstoppable DeFi train just keeps growing stronger. The concept of liquidity mining has taken off, catalyzed by the unprecedented success of the COMP token. This has boosted the entire DeFi ecosystem which is currently growing faster than most crypto markets themselves. Over the weekend, crypto markets remained mostly flat in terms of total market cap, which is hovering around the $265 billion level. In comparison, DeFi markets have gained 17%, reaching an all-time high in terms of total value locked across all platforms. Total value locked in DeFi has now topped $1.5 billion, which has exceeded February’s high by 22%. The TVL figure refers to the dollar value of crypto assets that have been deposited as collateral to power the decentralized lending and borrowing ecosystem. Ethereum is the foundation for the majority of these markets and there are 3 million ETH locked into DeFi smart contracts. This represents 2.7% of the entire supply of Ethereum. Even Bitcoiners are jumping on the DeFi train with the amount of BTC locked also hitting an all-time high at 6,800 (~$64 million) late last week.

Is DeFi a Bubble?

This wild speculation and liquidity mining ‘gold rush’ has generated discussion on the potential bubble effect that this all may have. The crypto community is still very polarized and tribalism is still rife. Writer, Kyle S. Gibson [@KyleSGibson], commented on the potential downside of such a surge;

The DeFi crowd should really be enjoying this shit while it lasts because the way down from a ridiculous high like this is going to be something to behold

Derivatives trader, Cantering Clark [@CanteringClark], echoed the sentiment that the current situation is unsustainable, adding that it is just going to become another crowded trade with one exit. There is a high likelihood that a large COMP selloff is inevitable as most players that have jumped onto the platform last week are in it for short-term gains. Once they see those profits they’ll start offloading the tokens which will cause a cascade effect, much to the delight of the detractors no doubt. Senior associate at Eblock Ventures, Nelson Ryan [@nelsonpryan], observed another side effect. Traders appear to be arbitraging by lending and borrowing at the same time. Higher yielding tokens such as BAT are gaining from this as they are bought up to be used in DeFi markets.

This is causing the price of some of these assets to rise as people buy these assets to supply and then borrow against them, which given that price is rising suggests that many are not hedging out this exposure, which works great as long as the price keeps rising…

At the time of press, Basic Attention Token was trading 5% up on the day while the rest of the market is relatively flat. The situation with COMP may be causing a micro-bubble effect in the DeFi ecosystem today, but it is completely different from the fervor and hype that emerged during the ICO bubble in late 2017.

One thing that could put the anchors on DeFi’s growth and adoption is regulation. So far the scene has escaped the heavy-handed governmental suppression that ended the ICO speculation boom two years ago. DeFi platforms are decentralized and largely automated which gives them the edge over centralized crypto exchanges and registered blockchain companies. ICO’s were a quick and dirty way to raise funds, often with no products to back up the tokens and their inflated values — basically being a casino for speculators. DeFi offers much more in the way of lending, borrowing, saving, trading, investing, earning, governing, hedging, arbitraging, and paying. Natural growth in on-chain activity for Ethereum has increased steadily over the past year or two due to it becoming the cornerstone of this new financial landscape. Network upgrades, such as scalability improvements and the rollout of Ethereum’s proof-of-stake protocol later this year, will spur greater capital inflows into Ethereum and the DeFi ecosystem.