Cratering Yields Sends DeFi Niche into Death Spiral

Falling yields and demand for popular governance tokens are ushering in an exit from DeFi platforms, flagging the DeFi bubble.  Still, protocols are actively responding with upgraded features and attractive incentives.

The DeFi Bubble Bursts 

YFI, the governance token for yEarn Finance, gained 1,000% since the beginning of August to record values around $45,000. Currently, the token is down 68% from the peak.  

The price of governance tokens for top lending platforms Compound and MarkerDAO have dipped 60% and 30% from their respective peaks. Moreover, Aave has also corrected 50% from its top. 

The falling prices of these tokens have sent the DeFi ecosystem into a death spiral as the percentage return for liquidity providers (LPs) begins to fall alongside tokens. 

The LPs on DeFi platforms earn from the returns on the network (e.g., fees on Uniswap, lending rates on Compound) and selling their newly- mined governance tokens. 

Due to the boom in DeFi token prices, yield farming emerging tokens became the main incentive for LPs. Still, upward prices depend on buyers who are willing to purchase newly-farmed DeFi tokens continuously. 

yields do not magically appear because of better vaults or strategies (unless value is created)

yields exist as long as retards are buying the fuck token

and yields disappear when these retail buyers are dead from catching falling knives and no one else wants to do it anymore pic.twitter.com/mWoM80USLT

— 찌 G 跻 じ ⚡️ 🔑 (@DegenSpartan) October 7, 2020

Low Yields Causing a Decline in Total Locked Value

During September, the median APR on Curve pools was around 13% and rose as high as 410%. In the last week, however, those returns have nearly halved. 

The annual return from the WETH vault on yEarn in the past week is 0.68%. At the time of launch, the strategy boasted 75% APR. The return from stablecoin vaults on yEarn during the same period ranged from 25% to 60%; currently, it has dropped below 10%. 

The size of the y-pool (in green below) on Curve declined by 22% in two days, with its USD value falling below $200 million. 

LP earnings on Uniswap from fees has also flatlined since September, indicating a pause in growth for decentralized swaps. 

Data pulled from the leading categories within the DeFi niche further outline the breadth of the current exit. 

The TVL in the derivatives and payments categories of DeFi has dropped nearly 50% from their September peaks. Moreover, the TVL on lending platforms and DEXes appears to have reached a local top as well. 

In response, some protocols are responding with upgrades and improved incentives to retain users. 

yEarn developers and YFI holders are banking their hopes on the launch of the v2 vault, an upgraded version of the current version. Curve is also adding new pools and implementing new strategies to revive the yields on its platform. 

Presently, falling yields and dips in the price of major governance tokens leave little economic incentives for new participants.