Some systems match lenders with borrowers and, based on demand from each side, calculate an “interest rate” for investors who pay money.
These are called “automated lending protocols,” and the biggest are Aave, Maker, and Compound, which fell 65%, 59%, and 72% respectively.
DeFi also offers “automated market makers” or decentralized exchanges, which automatically connect buyers and sellers and also provide liquidity to the markets.
The biggest are Uniswap, Curve, and PancakeSwap, which are down 60%, 78%, and 67%, respectively, since January 1. Australian DeFi projects include Synthetixdown 38%, Maple financingwhich is down 14 percent.
Although token prices are the most obvious way to track the performance of a DeFi project, yields show the demand for the system.
For example, if many people want to lend their money, the returns are high. When people don’t want to lend it, the returns are low. Returns in January were between 10% and 20%, while returns are between 0.5% and 5% now, showing how much money has been taken out of the crypto markets.
NFTs, or non-fungible tokens, have been hit the hardest in this latest crypto selloff. NFTs are any digital asset attached to a token and have seen an explosion in popularity in the digital art market.
The popularity of digital artwork fixed on NFT technology has made many people who had never been interested in crypto markets invest their money.
The only types of digital assets that have seen inflows are stablecoins. These are cryptocurrencies that trade online with another asset like the US dollar or the Australian dollar.
Although Bitcoin’s market capitalization has fallen by 70% this year, the market capitalization of all stablecoins has only decreased by 11%. Most analysts say this indicates that money has rushed out of many digital assets, but hasn’t left the ecosystem entirely.
What is causing the selloff (and is it just crypto)?
There are two main reasons why cryptocurrencies of all kinds have sold off.
The first is macroeconomic. For a long time, low interest rates meant that bonds and other “safe” investments paid very little, so investors were pushed into stocks and sometimes crypto to try and find returns.
Digital assets are notoriously volatile and subject to market sentiment and momentum, rather than fundamental analysis, so many keen traders were trying to make money on the moves.
Combined with rising lucrative DeFi yields and a flurry of NFT speculation, crypto markets have skyrocketed over the past few years.
But rising interest rates in the world means investors want to avoid holding risky assets right now.
Since the US Federal Reserve began raising interest rates in March – the first time in three years – and announced there would be many more hikes, investors have been pulling their money out of riskier markets. The US central bank acted again on July 27 lift rate another 0.75 of a percentage point.
This “risk-averse attitude” can be seen in the blind slump in high-growth tech stocks that fell 70%.
What is causing so many crypto “banks” to collapse?
The second reason cryptocurrencies are sold off is the widespread collapse of several major crypto “banks” and hedge funds. Specifically, Three Arrows Capital and Celsius crypto lenderwho have both filed for bankruptcy.
Much like during the Global Financial Crisis, these meltdowns boil down to huge amounts of leverage and borrowing in this latest crypto cycle.
In May, a the algorithmic stablecoin called Terra/Luna has collapsed. It was meant to remain firmly pegged to the US dollar through a trading mechanism. But the team behind the coin was paying traders 18% interest to keep the coin stable.
Terra/Luna was very widely held as a stablecoin and when it suddenly dropped to $0, many companies were in trouble.
One was based in Singapore Capital of the Three Arrows. Not only was it heavily exposed to Terra/Luna, but it also took out loans that it was unable to repay once the crypto meltdown hit.
Another collapsed crypto activity was Celsius, which offered clients returns of over 18% for depositing their digital assets. Celsius had taken those deposits and traded them on high-risk markets behind the scenes to earn the interest to pay back to customers.
One investment was actually in Three Arrows Capital; an illustration of market contagion that has crypto investors worried. How many big players are exposed to each other?
It turns out a lot. Greyscale Trust, BlockFi, Voyager are just a few of the names that had huge holes in their balance sheets when Three Arrows collapsed.
Another crypto bank, Babel Finance, is also struggling to stay solvent. It turns out that Babel was also taking depositors’ money and trading it without any behind-the-scenes risk controls.
Cryptocurrency exchange founded in Australia Zipmex was caught in the turmoillast month, announcing that he was trying to recover $69 million he lent to the rocky “bank”.
It should be noted that these companies are all centralized organizations. They are run by teams of people who have decided how much they want to borrow from their deposits.
Unlike traditional exchanges, which have automated “circuit breakers” that halt trades if the market begins to sell off drastically, crypto firms would not be able to stop the flow of money in time.
They were also borrowing more and more crypto to increase their returns. They took huge risks and it exploded.
The contagion within the crypto markets has not spread to other markets, but looking under the hood reveals just how intertwined many of these crypto projects are.
How does this compare to previous crashes?
This is not the first crypto crash. In fact, over the 10-year history of bitcoin, there have been several drops of 70%, as well as a mind-blowing 90% drop.
Ethereum, which emerged in 2015 with its crypto smart contract blockchain, has also suffered at least two 70% crashes.
During these accidents, he was quite clear what had caused the sales. It was either a hack or an exchange shut down with regulators banning the use of crypto or the macro picture had investors of all stripes cashing in on their investments.
This time around however, there are more complex reasons why cryptocurrencies – and there are 19,000 of them – are being sold.
But sophisticated crypto investors don’t seem particularly worried about the pullback.
If you’ve done your homework on the types of projects being developed and examine the economics of on-chain unit, many investors see a buying opportunity. just like stock market technology investors.
Can crypto bounce back from this?
Like many venture-backed or speculative ventures, crypto startups have fired waves of workers to save money.
But at the heart of much of the crypto industry “washout” is an internal debate, or re-examination, of decentralized vs. centralized companies.
For market watchers, crypto organizations built on-chain using decentralized systems have withstood the widespread carnage.
They say the blockchain-based technology that connects buyers and sellers, or lenders and borrowers, may experience less activity than usual, and their automated yield calculations might be lower, but the technology itself- even did not break.
In fact, many investors are thrilled that the sell-off has swept some of the overhyped, frantic and unsuspecting speculation-obsessed investors out of the market.