Most Ethereum-based DeFi coins have crashed over 20% and along with other market factors that are pushing DeFi lower

By Selena On Sep 6, 2020

Bitcoin is down about 20% while Ethereum has dropped more than 35%. Altcoins, however, have been hit even worse, especially those that have performed well in recent months. Most Ethereum-based DeFi coins have dropped more than 20% in the past 24 hours and even more in the past few days. Analysts say this could be a byproduct of simple market cycles, along with other market factors that are pushing DeFi lower.

Ethereum-based DeFi coins are being hit incredibly hard by the ongoing crypto market correction

According to CoinGecko, a swath of the top cryptocurrencies related to the sector are down by a lot over the past 24 hours: UMA has dropped 38.9%, BAND has fallen 34.5%, LEND has fallen 24.9%, Nexus Mutual has fallen 23%, Compound has fallen 21%, and much more.

Ari Paul, the founder of Blocktower Capital, recently argued that the DeFi space is currently undergoing a parabolic collapse:

2/ BTC had a clear parabola in 2017. A less clear one in 2019. Defi just had one burst. Maybe 1 time in 10 this heuristic will cost you money, that’s the highest hit rate for a trading rule that I’m aware of.

— Ari Paul ⛓️ (@AriDavidPaul) September 6, 2020

Crypto trader Qiao Wang has also noted that the SushiSwap exit will likely cause a “DeFi mini-winter” as capital exits the space.

The DeFi space arguably has room to grow, which suggests that this pullback may be a temporary move before an eventual return to a bull trend.

Andrew Kang, a crypto analyst, and investor noted in July that how DeFi was positioned indicates the sector has lots of room to grow in the future:

1/ DeFi has been around for years, but has only recently received serious recognition in the crypto community

But even with the buzz, the levels of understanding, usage, and capital allocation are all still low with high upside potential

— Andrew Kang (@Rewkang) July 1, 2020

What threatens the Ethereum ecosystem’s growth in the longer term, though, is a high transaction fee environment.

Jacob Franek, a co-founder of crypto data and analytics company Coin Metrics, recently noted that the too high transaction fees Ethereum users have been incurring could result in a natural hard cap to the bull run:

“Gas prices will put a hard cap on this DeFi bull run. To be expected and probably a good thing… High gas likely new normal.”

This may not be a longer-term concern if there are solutions like those proposed by Ethereum’s developers. But for the time being, it is a concern, primarily as the blockchain’s developers target more retail-centric users with new applications.

DeFi demand contributing significantly to stablecoins dominance

According to Coin Metrics, the demand for DeFi has increased demand for stablecoins significantly. This has led to a daily increase in the combined market cap of stablecoins by $100 million over the last two months.

Co-founder of Coin Metrics Nic Carter stated:

“Everyone got so excited about DeFi no one pointed out that stablecoins have been adding $100m/day since mid-July. DeFi yields/interest rates are clearly a vacuum sucking in a lot of stablecoins.”

everyone got so excited about DeFi no one pointed out that stablecoins have been adding $100m/day since mid Julyhttps://t.co/SM0hj7mBsp pic.twitter.com/ZGtzQOY9qL

— nic carter (@nic__carter) September 3, 2020

Even though categorized as cryptocurrencies, stablecoins possess the characteristics of fiat money, which is lower volatility. This may explain why they have become so popular in the space for payments, and even holding money, as value remains relatively stable. Even before the DeFi boom, they have been in high demand, especially in China, where there are strict restrictions on cryptocurrencies but not on stablecoins, especially USDT.

At this rate, stablecoins are rapidly gaining dominance on the cryptocurrency landscape due to this growing adoption. The most in-demand, USDT, has been moving up the ladder rather fast. It has knocked XRP out of the third position a number of times and though temporarily, it seems it has come to stay as the third-largest cryptocurrency by market cap.

As the demand for DeFi continues to rise, this difference may only get bigger over time, and stablecoin adoption may still go up, thus reinforcing their dominance.

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