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Will The DeFi Bubble Send ETH to a New All-Time High?

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The price of ETH in both USD and BTC terms has seen phenomenal gains in recent days thanks largely to the success of Decentralized Finance (DeFi). This success, which until now had not been particularly well reflected in the price of ETH, has begun to attract mainstream attention. Retail investors are only now beginning to consider the financial opportunities made available by DeFi and those looking to participate must acquire ETH.

Source: Google Trends

The scope of this potential bull run cannot be over stated. Liquidity mining or “yield farming” (cleverly designed incentives to bootstrap liquidity for Ethereum’s many financial applications) has created an enormous influx of capital onto the blockchain.

In the coming weeks this activity will continue at a rapid pace. The decentralized exchange, Curve, is launching their highly anticipated CRV token in “early August” while others like FutureSwap’s FST token are also expected in the near future.

Liquidity mining incentives are providing investors with access to 50%+ yields with regular payments that are immediately convertible to cash. Last week alone we saw yearn.finance’s liquidity mining strategy earn investors a yield that exceeded 1,000% at certain times. The platform’s token (YFI) saw its market capitalization rocket from zero to nearly $125 million in a matter of days – albeit with a little-known scare along the way.

As investors become more and more incentivized to buy into ETH and Ethereum tokens (not just for income generating assets but for capital growth too), the possibility of the market heading into an ICO-like bull run seems all the more likely. Combine this with the launch of Ethereum’s Phase 0 deposit contract (which will lock up ETH by the million) as well as anticipated news from PayPal, MasterCard, Visa and Libra, it’s within the realms of possibility that ETH breaks its all time high by Christmas.

But as Vitalik Buterin stoically Tweeted (excuse the oxymoron) in December 2017 when the total market cap of cryptocurrencies breached $500 billion for the first time; will we have “earned it”?

Governance tokens are – so far – looking promising. Users who provide liquidity (the life blood of the protocol) are being rewarded with the potential for future cash flows as governors of the system.

The success of these early tokens, however, is likely to be followed by an enormous inflow of cleverly-marketed incentives that seek to capitalize on the ever-increasing FOMO. Governance tokens are becoming the go-to mechanism for value creation, however that value will, in many cases, be transient. Users will farm governance tokens not out of an interest in the long-term success of the platform, but as a means of dumping them for additional profits. When the rewards dry up, so might the liquidity, and these clever incentives may transpire to be nothing more than a zero sum game.

As it stands, the world of liquidity mining is still in its very early stages. Similar to the very first ICO launches of Augur, Digix and Golem, these early DeFi platforms are launching incentives with a genuine mission to help decentralize the space. In the case of ICOs, it took years before the broader – less scrupulous market – caught on. In the DeFi bubble however, we can expect this to happen a lot quicker.

We are far from the top of this market cycle. Fall out from Covid-19 permitting, Ethereum is on a path to blaze another trail for cryptocurrencies that could push the total market cap well beyond $1 trillion.

As the excitement heats up, it’s important to retain a low time preference and consider profit taking on the way up so as to weather the inevitable winter that follows. We are already seeing over-exuberance in the form of Ethereum token, Ampleforth, which has seen its market cap grow from $3 million to over nearly $700 million in a few short months.

The mechanism of AMPL is perfectly tuned to capitalize on a bull market, something which may spill over into other cryptos, helping to stir even greater levels of 2017-like hysteria.

We’ll know when we’re at the top when the DeFi market begins filling up with fancy-looking websites and marketing double-speak. In the meantime, enjoy the frothiness that’s on offer and stay safe out there!

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0xNick
0xNick Founder