The DeFi Challenge

July 22, 2020 01:14 PM
DeFi continues to draw attention from crypto traders and mainstream media
Inflated token valuations and a lack of participant understanding are the risks
Decentralized Finance

Decentralized Finance





Bitcoin was trading decisively above USD 10,000 this morning in a broad-based crypto rally. Spot volumes are the best they have been in months with 24-hour activity about twice the 30-day average.


Decentralized finance (DeFi) continues to draw attention from crypto traders and mainstream media. Different applications have come into the spotlight after Compound Finance first came into focus several weeks ago. We continue to view the biggest issues as inflated token valuations and a lack of understanding among participants of their risks.

The new interest in DeFi kicked off with the Compound lending platform launching their COMP token, at the corner of their decentralized lending dynamic. At the time we gave a comprehensive description of the protocol and their new token and outlined some of the risks, “yield-farming” participants were exposing themselves to.

Since then, assets held on Compound have remained relatively steady but other similar platforms such as Curve Finance have seen their own share of growth. Curve, has seen about $300 million in asset growth in the last few weeks in spite of not having a native token on its platform. This chart shows a breakdown of assets held in DeFi, 

DeFi Pie Chart (YFI) has arguably been through the strangest period. Operating a platform similar in concept to Compound, they also launched a coin recently. The coin, which is barely traded anywhere, has rallied thousands of percent over the last week. This in spite of founders pleading that the intention of the coin wasn't for it to have any monetary value and urging caution from participants.

When we walked through the Compound Finance situation we highlighted the risks that were building. First, that yield farming was essentially a series of carry trades where participants were likely unaware of the implications of an unwind. Second, that token values were becoming inflated without any visibility into their ultimate use case and without showing fundamental value at all. Things are becoming particularly silly with tokens such as YFI and others, where investors appear to believe they are buying into some unspoken commitment to distribute protocol earnings to token holders at a later date. The token moves seem to be having some notable impact on Ethereum (ETH) price. ETH dominance has grown by nearly 2% in just a week and continues to be the best performer in the Top 10.

As for the DeFi tokens themselves, it's hard to not see how they’re headed for disaster. The most popular DeFi launches these days: lending protocols and on-chain derivative platforms, are relatively simple assets to value in that they have earnings streams. The valuations, even if one does assume redistribution of earnings (which token holders have no rights on) are priced at absolutely nonsensical levels. This without even talking about the potential for a major technical mishap from a group of unproven and often rushed protocols.


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