Decentralized finance (DeFi) market investment logic?

In yesterday’s article, we shared with you Compound, a DeFi project that has been particularly popular recently. Compound’s token COMP has increased more than five times from its lowest point of $65 to its highest point of $340 since its launch.

A while ago, the hot project - the decentralized exchange Loopring also recorded a nearly three-fold increase some time ago.

These rapidly rising projects are all subdivisions of DeFi, which makes many investors concerned whether their popularity indicates that the next wave of upsurge is DeFi? If the next wave of upsurge is DeFi, do investors still have the opportunity to deploy now?

To clarify the relationship, we still need to start with the project itself to see whether the popularity of the project is due to the rapid development of the application of the project or the entry of speculative funds due to the hype of the project.

Let's look at Compound first. In yesterday's article, I quoted the following picture:

This picture lists the deposit and loan interest rates of various tokens supported by the Compound application.From the figure, we find that the deposit and loan interest rates of ETH and DAI are very low, and these two tokens can be said to be the cornerstone of the entire DeFi, and they almost occupy most of the DeFi mortgage market. The deposit and loan interest rates of these two tokens are so low, it can only show that the current demand for ETH and DAI in DeFi is still very limited, so the entire DeFi ecosystem is still not active.

Therefore, the recent surge in the price of COMP tokens may be more caused by hot spots and hype that have attracted a large amount of speculative funds.

Let's look at Loopring again.

The picture above shows the trend of Loopring since it began to rise rapidly on May 17. After its price rose from the initial $0.0037 to the highest $0.11, it has now slowly fallen back to $0.085.

Loopring’s drop in price is one aspect, but what is more worthy of investors’ attention is that we need to deeply understand the reasons for Loopring’s rise in this round and conduct in-depth analysis to see if this reason can continue to have an impact on the currency price.

The breaking point of this round of Loopring is that the team successfully implemented the ZK-Rollup algorithm, which greatly improved transaction performance. This is an important event for the development of Ethereum technology and ecology. However, in practical applications, it still cannot gain enough recognition from users, because even though this technology has greatly improved the user's trading experience in decentralized exchanges, the overall experience is still inferior to traditional centralized exchanges. Therefore, it is still unable to threaten the status of centralized exchanges for the time being.

I think this is the reason why the price of Loopring has fallen and the reason why this hot spot cannot continue to work.

Let's look at Maker, another iconic token in DeFi. Maker is the token of MakerDAO. MakerDAO is the cornerstone of the DeFi stablecoin DAI, and DAI is the cornerstone of the entire DeFi application. If DeFi is fully launched, the price of Maker's currency will also start.

Then let’s take a look at the price trend of Maker currency this year:

The picture above shows the price trend of Maker currency since April.We found that its currency price has been hovering at $300 for a long time, but it has only risen slightly to $500 recently. This trend does not match the trend of COMP and Loopring at all. Therefore, Maker seems to have nothing to do with the surge of individual star projects this round.

Judging from the above data, I think that the individual hotspots in DeFi are still only individual phenomena. No matter in terms of user experience or profit model, there is no hot spot in DeFi that can last for a long time. However, it is not ruled out that individual projects will emerge in the future. If there is a project that is likely to emerge, it may happen in a follow-up project that imitates Compound to issue governance tokens.

If investors who intend to invest in DeFi for a long time but are worried about risks and don’t know how to find potential projects from many projects, I suggest that the simple way is to invest in MakerDAO’s token Maker, because it is the basis of all DeFi; if MakerDAO If you are not familiar with or even worried about risks, the easier way is to invest in Ethereum ETH, because it is the foundation of all ecology.