Ever Wonder What A DeFi Meltdown Might Look Like?

September 8, 2020 01:14 PM
Decentralized Finance

Decentralized Finance





Crypto prices have stabilized after significant declines and volatility over the weekend. Bitcoin (BTC) continues to trade on either side of USD 10,000.


We recently got our first example of what decentralized finance (DeFi) unwind has the potential to look like. This past weekend saw precipitous price declines among DeFi tokens in what had otherwise been a consistent month-long bull-run in the subsector. Ethereum for its part is down nearly 30% over the last 7-days, the lowest levels since July. Among notable DeFi decliners was SushiSwap which was down 88% at its most depressed. There the protocol's anonymous founder and lead developer, Chef Nomi was seen to cash-out approximately USD 15 million worth of tokens before executives at crypto-exchange FTX took over the platform. Other DeFi protocols such as Ampleforth and DFI.money saw their tokens decline similar amounts. BTC, though only loosely associated with DeFi, wasn’t able to avoid declines with the coin down approximately 15% over 7-days.

In spite of all the layered complexity, the DeFi, value proposition for traders right now is relatively simple. Traders invest in carry-trades that earn DeFi tokens. So long as spreads maintain and the tokens being earned continue on their upward trajectory participants are fine. However, when these trades begin to unwind the exits are very small and you can have 90% declines as was seen over the weekend. The idea that an anonymous founder can create something called SushiSwap and in a month see it reach a USD 1 billion valuation are the kind of stories that are detrimental to long-term idealists in the space. Opportunistic lawyers are already trying to wrangle together class-action suits. This wave of DeFi continues to seem alive but this weekend gave a preview on how ugly things could get.

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About the Author

FRNT Financial is a technology and sales layer that offers institutional and accredited investors access to various forms of exposure to crypto-assets. You can subscribe to FRNT Financial Morning Note at https://www.frnt.io/morningnote