The vibe is palpable. Bitcoin enthusiasts are celebrating its all-time high this week, and Ethereum’s Ether broke its own record price of $4,357. Make no mistake, it’s a good time to be holding crypto, but it’s better if you’re in the two biggest cryptocurrencies than in DeFi’s blue chips.
The DeFi Pulse Index, a benchmark comprising 10 of the most valuable tokens in decentralized finance, is lagging behind ETH. And not in a small way. The index, which includes tokens from Uniswap, Aave, and MakerDAO, is up a modest 26% in the last 90 days, according to data from CoinGecko. In contrast, ETH has surged more than 102% in that same period.
Measured another way, DPI has actually slid 21.8% against ETH for the last 30 days, and is at the lowest level ever in ETH terms in Coingecko data going back to Sept. 2020.
What gives? It stands to reason that the leading DeFi tokens would outperform or at least keep pace with Ethereum. These are the platforms, after all, that are putting decentralized finance to work with new applications. Backers of tokens representing the future of finance would surely like to see it trade well against ETH, which is a relatively simple buy and hold trade.
Occultist, a well-known DeFi thinker, told The Defiant the problem is that the tokens behind open finance protocols don’t have enough intrinsic value.
“The biggest problem in DeFi right now is the tokenomic structure of many ‘DeFi Blue Chips’,” said the influencer. “For many of these protocols to function well they require users to provide liquidity. The problem here is that users need to be incentivized for providing their liquidity which is costly for the protocol.”
Occultist is referring to a problem that so-called DeFi 2.0 aims to solve by acquiring liquidity permanently. This contrasts with liquidity mining whereby a protocol uses its native token to incentivize users to make deposits.
Liquidity Mining Strategies
“Many of these protocols had to create liquidity out of thin air with very little resources to do so. Props to them, but it has shown to be far too costly and the result is a diluted supply of a token that no one actually wants,” Occultist said.
Many projects included in DPI have used liquidity mining strategies to varying degrees. Uniswap, which is weighted as roughly a quarter of the index, did so sparingly back in September, in addition to a retroactive airdrop. Uniswap’s UNI has actually been propping up DPI — the token has risen 27% in the last 30 days, trouncing DPI’s 10.2% performance.
On the flipside, AAVE, the token of the lending giant by the same name and DPI’s No. 2 weighting, has underperformed the index with an increase of 8%. Compound’s COMP token has actually fallen 4.8% in the last month, perhaps because investors balked at a buggy update released by the project that resulted in 280,000 COMP being siphoned from the contract that distributed liquidity rewards.
Still, there is a way forward for the blue chips, Occultist said. “Community leaders need to step forward and propose new utility for the native token,” he said. “Fee share and or buybacks should be turned on by now, and it’s surprising to see protocols with treasuries in the billions who have yet to share some of that with the token holders.”
With Web3 on the horizon, Uniswap and its ilk will have ample opportunity to show their utility and make a fresh case to inventors. Maybe then they’ll buy and hold DeFi blue chips the same way they do with ETH.