3 reasons why DeFi investors should always look before leaping HEAD TOPICS

3 reasons why DeFi investors should always look before leaping

10/22/2022 12:02:00 AM

Investing in DeFi is risky Here are three tips that can help investors avoid heavy losses

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Cointelegraph

This year proved that investing in DeFi is risky, but there are ways to avoid getting rekt. Big_Smokey1 shares three simple ways to properly vet a DeFi platform. Investing in DeFi is risky Here are three tips that can help investors avoid heavy losses . In the next few weeks, this newsletter will be renamed Crypto Market Musings, a weekly newsletter that provides ahead-of-the-curve analysis and tracks emerging trends in the crypto market.During the DeFi summer, protocols were able to lure liquidity providers by offering three- to four-digit yields and mechanisms like liquid staking, lending via asset collateralization and token rewards for staking. The big issue was many of these reward offerings were unsustainable, and high emissions from some protocols led liquidity providers to auto-dump their rewards, creating constant sell pressure on a token’s price. Read more:
Cointelegraph » Bank of England policy committee member says DeFi isn’t decentralized SBF posts regulatory 'manual' for crypto and FTX, cautions against 'locking in' DeFi policy Report: Half of all DeFi exploits are cross-bridge hacks Stealthy Crypto Hedge Fund Edge Capital Raises $66.8M for DeFi Bets

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The BBC has taken a swipe at outgoing UK Prime Minister Liz Truss — with a little help from Rihanna. Read more >> big_smokey1 too easy to get rekt 😂 Bank of England policy committee member says DeFi isn’t decentralizedA senior advisor to the Bank of England suggested that decentralized finance is not as decentralized as it claims to be in a speech to the University Also £ SBF posts regulatory 'manual' for crypto and FTX, cautions against 'locking in' DeFi policySBF posts regulatory ‘manual’ for crypto and FTX, cautions against ‘locking in’ DeFi policy The very nodes they run for their clients is based on 'locking in' TVL so they can shill. How is FTX exempt from US regulations again ? Is there anything like it? Is there anything like it? Report: Half of all DeFi exploits are cross-bridge hacksSecurity experts said that a major factor behind the plunder is the complexity of cross-chain bridges, lack of developers' knowledge, together with their open-source nature, ultimately attracting the attention from blackhats. This is why Algorand DYOR Folks ! centralised hackers Bridge_Mutual can you also insure bridge protocols ? Stealthy Crypto Hedge Fund Edge Capital Raises $66.8M for DeFi BetsSCOOP: Edge Capital Management, a newer crypto hedge fund, has raised $66.78 million across two of its DeFi-focused funds. BrandyBetz reports Sam Bankman-Fried draws fire from DeFi proponents after regulation proposalSam Bankman-Fried's regulatory proposal has not gone over well with many in the blockchain and cryptocurrency industry — with claims it hamstrings DeFi. Instead of just proposing something that help him and his companies, the bro needs to work with a wide swath of industry players to come up with a reasonably acceptable proposal. He has a lot to learn still. How is FTX again exempt from offering , unregistered and reckless perpetuals ? IOHK_Charles Thoughts ? 'Secretly circulating' draft crypto bill could be a ‘boon’ to DeFiA new draft of the 'DeFi killing' crypto bill 'secretly circulating' in Washington has now been shared online, with some suggesting it could be a 'boon' to DeFi. Good? I think this is punishment. Finally some positive defi news That's great news! Putting this alongside the fact that there are plenty of massive entities like BitDAO allocating large sums of money towards the development of DeFi, you get a guaranteed future for Web3. 0:00 Newsletter Welcome readers, and thanks for subscribing! The Altcoin Roundup newsletter is now authored by Cointelegraph’s resident newsletter writer Big Smokey .customers, and could lead to financial stress more broadly .Quick Take In the absence of clear crypto regulations, FTX CEO Sam Bankman-Fried released a lengthy “industry norms manual.October 18, 2022 Cross-chain bridges, which allow users to port digital assets from one chain to another, are known for their ability to solve multi-chain scaling issues. In the next few weeks, this newsletter will be renamed Crypto Market Musings, a weekly newsletter that provides ahead-of-the-curve analysis and tracks emerging trends in the crypto market. The publication date of the newsletter will remain the same, and the content will still place a heavy emphasis on the technical and fundamental analysis of cryptocurrencies from a more macro perspective in order to identify key shifts in investor sentiment and market structure. The central bank advisor noted that regulation and legislation in digital assets remain a work in progress, but called on the private sector and DeFi investors to do more in ensuring the safety and proper governance of projects and digital assets. We hope you enjoy it! DeFi has a problem, pump and dumps When the bull market was in full swing, investing in decentralized finance (DeFi) tokens was like shooting fish in a barrel, but now that inflows to the sector pale in comparison to the market’s heyday, it’s much harder to identify good trades in the space. During the DeFi summer, protocols were able to lure liquidity providers by offering three- to four-digit yields and mechanisms like liquid staking, lending via asset collateralization and token rewards for staking."Major investors must 'get up, stand up' to demand change. The big issue was many of these reward offerings were unsustainable, and high emissions from some protocols led liquidity providers to auto-dump their rewards, creating constant sell pressure on a token’s price." It also appears that the vast majority of the cross-change exploits happened thus far took place on Ethereum Virtual Machine (EVM) blockchains. Total value locked (TVL) wars were another challenge faced by DeFi protocols, which had to constantly vie for investor capital in order to maintain the number of “users” willing to lock their funds within the protocol." When it comes to proof-of-work blockchains, Wilkins warned that crypto miners can take advantage of their position by making decisions on how to execute transactions, or manipulate the market in what is known as maximal extractable value. This created a scenario where mercenary capital from whales and other cash-flush investors essentially airdropped funds to platforms offering the highest APY rewards for a short period of time, before eventually dumping rewards in the open market and shifting the investment funds to the greener pastures. For platforms that secured series funding from venture capitalists, the same sort of activity took place. Wilkins also noted that the incumbent financial sector has begun adopting blockchains, lending added urgency to the need for improvements from digital asset projects. VCs pledge funds in exchange for tokens, and these entities reside in the ranks of the largest tokenholders in the most lucrative liquidity pools. The looming threat of token unlocks from early investors, high reward emissions and the steady auto-dumping of said rewards led to constant sell pressure and obviously stood in the way of any investor deciding to make a long investment based on fundamental analysis. “Regulated firms in traditional finance are increasingly applying the underlying blockchain technology to traditional capital markets. Combined, each of these scenarios created a vicious cycle where protocol TVL and the platform’s native token would basically launch, pump, dump and then slip into obscurity. Rinse, wash, repeat.” © 2022 The Block Crypto, Inc. So, how does one actually look beyond the candlestick chart to see if a DeFi platform is worth “investing” in? Let’s take a look. Is there revenue? Algorand market capitalization vs. This article is provided for informational purposes only. revenue (180 days). Source: Token Terminal GMX market cap vs. About Author Inbar Preiss is a Brussels-based policy reporter at The Block, focusing on Europe. revenue (180 days). Source: Token Terminal Yes, one is going up and the other is going down (LOL). Get in touch on Twitter @InbarPreiss. Of course, that’s the first thing investors look for, but there’s more. In the first chart, one will notice that Algorand ( ) has a $2. 15-billion circulating market cap and a fully diluted market cap of $3.06 billion. Yet its 30-day revenue and annualized revenue are $7,690 and $93,600, respectively. Eye-raising, isn’t it? Algorand protocol data. Source: Token Terminal Circling back to the first chart, we can see that while maintaining a $2. 15-billion circulating market cap and supporting a wide ecosystem of assorted decentralized applications (DApps), Algorand only managed to produce $336 in revenue on Oct. 19. Unless there’s something wrong with the data or some metrics related to Algorand and its ecosystem are not captured by Token Terminal, this is shocking. Looking at the chart legend, one will also note that there are no token incentives or supply-side fees distributed to liquidity providers and token stakers. Related: 3 emerging crypto trends to keep an eye on while Bitcoin price consolidates GMX, on the other hand, tells a different story. While maintaining a circulating market cap of $272 million and an annualized revenue of $28.92 million, GMX’s cumulative supply-side fees have steadily increased to the tune of $33.9 million since April 24, 2022. Supply-side fees represent the percentage of fees that go to service providers, including liquidity providers. GMX cumulative supply side fees vs. revenue. Source: Token Terminal Issuance and inflation Before investing in a DeFi project, it’s wise to take a look at the token’s total supply, circulating supply, inflation rate and issuance rate. These metrics measure how many tokens are currently circulating in the market and the projected increase (issuance) of tokens in circulation. When it comes to DeFi tokens and altcoins, dilution is something that investors should be worried about, hence the allure of Bitcoin’s ( ) supply cap and low inflation. Bitcoin issuance and inflation data. Source: Messari As shown below, compared to BTC, ALGO’s inflation rate and projected total supply are high. ALGO’s total supply is capped at 10 billion, with data showing 7 billion tokens in circulation today, but given the current revenue generated from fees and the amount shared with tokenholders, the supply cap and inflation rate don’t inspire much confidence. Before taking up a position in ALGO, investors should look for more growth and daily active users of Algorand’s DApp ecosystem, and there obviously needs to be an uptick in fees and revenue. ALGO issuance and inflation data. Source: Messari Active addresses and daily active users Whether revenues are high or low, two other important metrics to check are active addresses and daily active users if the data is available. Algorand has a multi-billion-dollar market cap and a 10-billion ALGO max supply, but low annual revenue and few token incentives present the question of whether the ecosystem’s growth is anemic. Viewing the chart below, we can see that ALGO active addresses are rising, but generally, the growth is flat, and active address spikes appear to follow price surges and sell-offs. As of Oct. 14, there were 72,624 active addresses on Algorand. ALGO active address count. Source: Messari Like most DeFi protocols, the Polygon network has also seen a steady decline in daily active users and ’s price. Data from CryptoQuant shows 2,714 active addresses, which pales in comparison to the 16,821 seen on May 17, 2021. Polygon active address count. Source: CryptoQuant Still, despite the decline, data from DappRadar shows a good deal of user activity and volume spread across various Polygon DApps. Polygon DApps. Source: DappRadar The same cannot be said for the DApps on Algorand. Algorand DApps. Source: DappRadar Right now, the crypto market is in a bear market, and this complicates trading for most investors. At the moment, investors should probably sit on their hands instead of taking kiss-and-a-prayer moon shots at every small breakout that turns out to be bull traps. Investors might be better served by just sitting on their hands and tracking the data to see when new trends emerge, then looking deeper into the fundamentals that might back the sustainability of the new trend. This newsletter was written by Big Smokey, the author of The Humble Pontificator Substack and resident newsletter author at Cointelegraph. Each Friday, Big Smokey will write market insights, trending how-tos, analyses and early-bird research on potential emerging trends within the crypto market. The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision. .