Where does DeFi go from here? November 4th to 11th


This week definitely feels calmer and more positive than the last. There are good reasons why DeFi bulls are optimistic too, as the market has rebounded significantly since my last newsletter.

People call it a “blue chip” rally, which means that it is familiar names that top the charts (at least that’s the standard definition, it can refer to their blue logos too). AAVE and YFI rallied the most, followed by decent rallies for Curve and Synthetix. These are big names, but at the same time I would nickname things like Uniswap, Compound, Maker “Blue Chip” – all of which made lukewarm profits at best.

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In any case, the DeFi Pulse Index is pretty good:

But to me it seems like a rebound from oversold conditions that occurs even in deep bear markets. The drop sparked discussion about what exactly we saw over the summer, mostly whether it’s like 2016 or 2017. The latter had a short decay from September to October to end the year in style, while the former was fairly consistent but slowly produced growth back to previous all-time highs.

As much as the “thought leaders” on Twitter are optimistic about everything, I would say that we are firmly in the camp in 2016, and there is a table that sums it up so succinctly:

Google trends for Bitcoin (red), Ethereum (yellow), DeFi (blue).

There’s a pretty big bump on DeFi searches in the summer, in fact. Do not you see it? This is because the relative performance itself pales in comparison to cryptocurrency overall and mainstream awareness is nowhere to be seen like it was in 2017. It is worth noting, however, that these results are there from the start:

Searches for DeFi, filtered by the “Financial Markets” category.

There is definitely a positive argument here as it appears we are still at the top of the first inning.

At the same time, I think this DeFi rally sums up the worst aspects of 2016 and 2017 into one. We saw a lot of market naivety and fundamental back-end infrastructure failure that resulted in gigantic fees – basically 2017 – and at the same time the average Joe just hasn’t heard about it – that’s 2016.

FTX’s CEO now says that even Ethereum 2.0 would not be enough to handle a load approaching mainstream popularity, which is reasonable given the much higher processing requirements of DeFi smart contracts.

Overall, I think the sector is unlikely to resume growth until we have much, much better scaling (promising news on this front for 2021 and more use cases than just playing Ponzi games or, at best, lending to rich crypto whales .