Ethereum cracks all-time high in the short term and DeFi is weakening – why?

While both Bitcoin and Ethereum hit new all-time highs this week, the decentralized finance (DeFi) sector has disappointed many investors so far – that’s why.

The enthusiasm of the crypto community was great this week. Bitcoin (BTC) and Ethereum (ETH) both made new all-time highs. ETH climbed to as much as $ 4,361 at times and BTC climbed to as much as $ 67,277. There is no question that anyone holding one of the two cryptocurrencies has benefited from significant price gains in recent weeks. However, the situation is different in the decentralized finance sector.

Despite a renewed all-time high of Total Value Locked (TVL) in the DeFi area, the prices of established DeFi heavyweights in particular have recently disappointed. The DeFi Pulse Index (DPI), which is considered a benchmark for the sector and therefore similar to an ETF 17 of the most valuable tokens includes (Uniswap, Aave, MakerDAO, SushiSwap, Compound, …), performed significantly worse than Ethereum.

While Ethereum was able to gain almost 50 percent within the last 30 days, DPI grew by only 22 percent in the same period.

In other words, it means that DPI has fallen 28 percent compared to Ethereum. Compared to Ethereum, DPI is at its lowest level ever at the time of going to press.

But what are the reasons for the poor development of many DeFi projects?


Why Ethereum is outperforming DeFi

One should actually believe that a well-balanced “ETF token”, which is supposed to represent the future of finance, will grow better or at least at the same rate than Ethereum. After all, these protocols form the infrastructure for an entirely new financial system. However, the last few months have shown that this is not the case. Of the DeFi expert Occultist assumes on Twitter that this is particularly related to the less sustainable token models of many DeFi projects.

Because in order for many DeFi projects to work, they must have sufficient liquidity for their services. The problem with this is that most DeFi projects have to lure their users to provide liquidity with token rewards (liquidity mining). The disadvantage of this method is that this method of acquiring liquidity is very costly for many protocols.

DeFi 2.0 gives hope

Occultist is convinced that DeFi 2.0 can solve this problem. DeFi 2.0 projects focus on improving existing DeFi protocols, for example by offering cheaper options, as is the case with OlympusDAO (OMH), with which projects can provide liquidity for their protocols. In contrast to liquidity mining, this approach stands for more sustainability and can help to improve existing token models.

Another reason why Decentralized Finance is currently doing comparatively poorly is probably due to the unclear regulatory framework. The SEC announced at the end of September that it wanted to put the DeFi sector in its place.

At the moment, however, there is still a great deal of uncertainty as to how she would like to implement this project. In particular, a lack of know-your-customer procedures and a lack of anti-money laundering measures in decentralized finance are a thorn in the side of stock exchange regulators worldwide. It is therefore quite possible that institutional investors in particular will shy away from investing in decentralized finance due to these uncertainties.



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