3 September 2020

Admittedly, the cryptocurrency market is in shambles.  Popular digital assets in the top 10 are deep in red, bleeding value. A few days back it was unconscionable to cast doubt on the second most valuable digital asset. Many expected the Ethereum price to breeze past $500.

Behind this optimism is open finance, colloquially known as DeFi. DeFi is a blockchain attempt to replicate traditional financial operations enabling trustless lending and borrowing. There are several incentivization models employed by DeFi software programs each registering varying levels of success influenced directly by their value propositions. 

With ETH oiling the Ethereum ecosystem, it stood to squeeze out all benefits. And it is. ETH is presently outperforming BTC if statistics are anything to go by.  However, cracks are beginning to emerge. Today, the ETH fell to around $421 after nearly retesting $500. The drop alone crashed the bubbly DeFi markets as protocol liquidations wiped millions of dollars of ETH. 

To quantify, the Ethereum DeFi scene lost $500 million as Aave, one of the leading lending software, took a six percent hit.

Figure 1: TVL Shrinks

The Beginning of the End for DeFi?

Supportive facts cement our bearish convictions. 

First off, there is a direct correlation between the price of ETH and the Total Value Locked (TVL). Superimposing the trends of TVL on the ETH/USD price chart in the last three quarters reveals a ton.

Second, price action (assuming the crypto market is efficient with no manipulative tactics behind the order books).

This leads us to the second part:  Are ETH bulls exhausted? Or is this a pause before the trend resumes?

Looking at the candlestick arrangement in the daily chart of the ETH/USD pair (data from Bitstamp), there is a hint of exhaustion. A simple technical analysis supports this argument. After the close of Sep 2 conspicuous, high-volume candlestick, a double bar bearish reversal pattern printed in the daily chart. 

Figure 2: ETH/USD Daily Chart for Sep 2

Notably, the bear bar reversed Sep 1 gains, closing below the upper BB. Although there might be bullish attempts in lower time frames—citing the long lower wick, an eagle eye assessment from the weekly chart suggests otherwise. 

Figure 3: ETH/USD Weekly Chart for Sep 2

This week’s candlestick has a long upper wick likely pointing to profit-taking, a development which is heaping pressure on ETH bulls.

Besides technical indicators, on-chain activities show weakness from the investors’ perspective. Because of an unsustainable consensus model prioritizing miners (security) over scalability and utility, users are now reconsidering their positions. 

Gas fees—or the cost of transacting in Ethereum, is way out of reach. The high transaction fee is now proving consequential–and if push comes to shove, catastrophic in the immediate term.

Figure 4: Ethereum versus Bitcoin Transaction Fees

With rising fees, decent profits made in DeFi are unfairly but justifiably gobbled by miners slashing profitability by an outrageous factor. Inevitably, this is forcing some to give up altogether. 

So prohibitive is the current state of Ethereum that purchases of $50 or less worth of ETH or tokens won’t go through. Combining both points to a network with a high utilization rate but strangling itself from the inside—think of a poisoned chalice. The resulting Domino Effect will likely have a huge impact on price—and yes, return on investment (ROI).

Going forward, we suggest proceeding with caution. After all, in the Greater Fool Theory, it is wise not to expose your soft underbelly.

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Edmund McCormack
Tech industry veteran and blockchain technology investor. Simplifying cryptocurrency for almost a decade.

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