22 September 2020

Admittedly, cryptocurrencies are mostly speculative. Yes, Bitcoin is now more robust and relatively stable, with more institutional participation. However, altcoins, including Ethereum’s unicorn projects, remain fragile. More so, the Ethereum DeFi ecosystem is characterized with daring experimentation.

To gauge the extent of this year’s trials, we need not look further than the evolution of DeFi yield farming. The intrigues of the emerging sub-sector has pushed the number of Ethereum daily transactions to new levels, even beyond the climactic rush of late 2017, early 2018 ICO-pump. While some may dismiss these claims, the simple fact that DeFi applications expanded to lock over 8.5 billion in just under three years is quite significant.

Besides, the sub-sector, though promising, remains captive of ETH price gyrations and Ethereum’s underlying fundamentals. Thanks to collateral debt positions, over-collateralization, speculations, and what’s not, pumping or sliding ETH prices tend to significantly affect capital flow into different DeFi protocols. 

And there is every reason to anchor on the Ethereum price as a prime mover in DeFi circles. There have been events in the past to demonstrate how rising ETH prices directly impact the number of ETH locked under management by DeFi dApps. Cycling back to mid-March when the price of the Ethereum price tumbled by over 45 percent to around $200, DeFi tokens were literally destroyed thanks in part to the FUD and the resulting capital pullout from different protocols. 

We are seeing the same happen in real-time at spot rates. By Sep 21 close, ETH was getting pummeled, down seven percent versus the greenback, and concurrently trailing BTC. Meanwhile, DeFi assets posted deep losses as the contraction of ETH prices caused a contraction, forcing liquidation across some of DeFi’s protocols. A single-digit loss by ether, which shrunk to below $350, led to double-digit losses in governance tokens of most leading protocols. YFI, the governance token of the Robo-advisor Yearn Finance, fell 22 percent to around $22.4k, Aave’s LEND dropped 21 percent, Uniswap’s UNI lost 13 percent, while Sushiswap’s SUSHI was down 13 percent.

Clearly, YFI is highly reliant on ETH prices and is fragile given the extent of yesterday’s losses.

Question is: if the ETH Bull Run is over and prices are cooling down, could this be the beginning of a DeFi rout?

The answer could be a straight yes, but a softer answer depends on the candlestick arrangement of the ETH/USD price chart:

Figure 1: Ethereum Price Chart by TradingView

There were flickers of strength early last week but the ETH price is now firmly under the clutches of bears. Yesterday’s plunge signaled bear trend continuation of Sep 1 and 2. However, the rapidity of the past three weeks’ losses and the inability of ETH bulls to offer support hints of a possible exhaustion and an inevitable correction.

Immediate support is at $320. The tight $40 belt capped at $360 and $320 is a strong support zone marking the 50 and 61.8 percent Fibonacci retracement levels of the June to Sep 2020 trade range. Historically, crypto prices retracements are deep, often reacting at the 78.6 percent Fibonacci retracement level. As such, a break below $320 could push ETH prices back to $250 to $280 zone in a retest.

If candlestick arrangement suggests bears and ETH lose another $100, DeFi governance tokens will be devastated in what could be yet another tempering wave that will weed out chaff from true gems. On the bright side, development towards Eth2 is seamless with no technical hitches. This could be supportive of ETH prices at least in the immediate to medium term. Understandably, so much anchors on Eth2 and Proof-of-Stake.

The launch of the Beacon Chain mainnet and activation of Proof-of-Stake is in weeks, not months as earlier thought. Following technical hitches and time relay errors experienced in Medalla, the RocketPool 2.5 Medalla Rolling Beta and Spadina testnet will be the last hurdle before launch.  The exact activation day remains tentative and rumored to be in November 2020. Good news is, it is sooner rather than later, a net positive for holders and DeFi yield farmers, a deviation from Ethereum’s modus operandi where it is a norm for critical upgrades to be delayed by months. Then again, once Ethereum will be operating full throttle complete with a staking system, it ought to be incentivizing enough. At spot rates, yields from robo-investors like ETH or wETH vaults return higher rates than project staking yields.

Since the security of Ethereum will anchor on price, it appears that current dips present loading opportunities as prices will likely edge higher and Etherum developers seek to strike a symbiotic balance to incentivize validators, preventing them from channeling their coins to projected ETH “sinks.” Before then, the current shake off paints a true picture of  DeFi protocol’s resilience and whether they can withstand raging price storms; possibly even chart the same path as Ethereum did in its early stage.

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