The DeFi craze that the world experienced this summer over the period where COVID-19 was at its peak seems almost like a distant memory now, especially as the DeFi market continues to decline week after week with little to no new developments in the sector. The market is certainly cooling off, and this is not only evident in the lack of discussion buzz for DeFi, but also in DeFi index futures, according to Coindesk.
The launch of new DeFi related indexes came swiftly in the midst of its explosive growth, with leading crypto derivatives trading platforms FTX and Binance seeing falls in trades for their DeFi Index and DeFi Composite Index respectively. Between both exchanges, DeFi futures contracts took a nosedive of approximately 60-70%, trading downwards at a severe loss. SCN’s very own SCN30 Index, which reflects the cumulative strength of curated Altcoins, including DeFi tokens, in the space has also stuck in the sideways price action.
There are a number of reasons for that. Firstly, the sudden bullish momentum for the world’s bellwether cryptocurrency and its incredible price gains attracted an outflow of investors from DeFi platforms and products back into Bitcoin, and also other crypto assets with a proven track record. PayPal’s vote of confidence for cryptocurrency was both unexpected and a major boost for the Bitcoin market which led to the orange coin’s rally over $13,000. Following that, this week with the 2020 US elections, Bitcoin struck the $14,000 level and managed to break above for the first time in three years.
Bitcoin Regaining Market Dominance | TradingView
What is more crucial is perhaps the fundamental weaknesses of the DeFi sector and the products and offerings we have seen so far over the course of the last six months. Security breaches remain one of the sector’s major challenges, and accumulated doubt over the reliability of DeFi projects is beginning to show. All these problems are not new, of course, but before, they were glossed over in favour of the incentives and rewards offered by individual projects, one after another. Now that rewards have tapered off, it stands to reason that traders are moving away from DeFi to projects and assets with greater foundation.
There is certainly some breath left in the DeFi space and it would be unwise to write it off immediately, but analysts suggest that it requires a rebranding to invite a second wave of popularity in the current market. Moreover, small projects that jumped on the DeFi bandwagon hoping to make a quick buck without building a strong core will find themselves being forced out of the market as well.
The only good news to come out of the fall in DeFi is decreased gas fees on the Ethereum network, which has been plagued by unprecedented congestion and ridiculous transaction fees when the demand for DeFi tokens was at its peak.
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