With most major cryptocurrencies down 15% to 20% over the past 24 hours and the idea that bitcoin is a hedge against inflation on par with gold relegated to the dustbin of crypto hype history, it’s time to ask if the glory days of decentralized finance (DeFi) are over, too.
At the height of the 2021 crypto boom in November, more than $105 billion in various cryptocurrencies were locked — invested — in DeFi lending and staking platforms. Now, its $45 billion.
See also: PYMNTS DeFi Series: What Is DeFi?
That sounds bad until you consider that bitcoin, worth around $24,000 on Monday (June 13), was about $68,000 at the time, so it’s down about 65% to Defi’s 60%. That means that DeFi investing has been growing, while crypto has cratered.
And why not? Before it crashed to virtually nothing last month, the terraUSD stablecoin was supported in large part by Anchor Protocol, a crypto lending platform that was offering 18% to 20% interest.
Those are numbers that led digital investment bank Galaxy Digital CEO Mike Novogratz to warn investors not to be “greedy” at a trade show this weekend — before the latest bloodbath — noting that 18% is a return that can’t come without high risk.
Read more: Stablecoins’ Wobbly Dollar Pegs Add to Crypto Market Chaos
On the back of that sky-high return, nearly three quarters of all $18 billion worth of the vastly unstable stablecoin extant until May 9 was locked into Anchor, a DeFi lender that lets people put up crypto as collateral to borrow against — with most of the borrowed funds cycling back into other DeFi projects. That super-centralization of what was supposed to be a DeFi product helped it unravel as quickly as it did.
More broadly, all of those ultimately have their roots in high crypto prices going higher as investors keep piling in money. When that stops happening, the gravy train will slow substantially.
See here: PYMNTS DeFi Series: What is Yield Farming and Liquidity Mining?
DeFi Centralizes
Over the past seven months, a growing chorus, both inside and outside of crypto, has been warning that interest rates that start at 2% to 5% — already far better than you’ll get at a bank — before going up to 20% or more, sometimes far more, could not possibly be safe investments.
So, what happened? Centralized exchanges decided to get in on the action. In no small part, this was because actual DeFi projects can be fairly difficult to navigate without a fair bit of knowledge.
The biggest crypto exchanges in the U.S. all offer high-interest returns for staking crypto, and most were getting into lending as well, until the Securities and Exchange Commission (SEC), warned Coinbase not to, and subsequently forced a $100 million settlement from BlockFi to end an illegal securities sales lawsuit.
Yet Coinbase does offer up to 5.75% interest for staking, FTX up to 8%, Gemini up to 8.5%, Crypto.com up to 14.5%, and Kraken an eye-popping 23%.
It’s something that crypto’s opponents — most notably Sen. Elizabeth Warren, D-Mass., but also plenty of others — have been shouting from the rooftops for months.
More here: Sen. Warren Calls DeFi the ‘Most Dangerous’ Part of Crypto at Senate Hearing
There are growing signs that crypto’s wild ride is over — at least for now.
Last week, top U.S. crypto exchange Coinbase announced belt-tightening measures — even before its stock tanked another 14% today. And Crypto.com just announced it is cutting about 5% of its employees, while BlockFi — likely hindered by that massive settlement payout — is cutting about 20%.
Treasury Secretary Janet Yellen just pronounced cryptocurrencies an unfit investment for 401(k) retirement accounts, in response to Fidelity’s recent announcement that it planned to start offering it.
More broadly, regulators are circling. With DeFi high on their priority list — though not as high as stablecoins — it seems likely that outlandish interest rates will see a crackdown. On the other hand, when there’s 23% to be made, things like risk tolerance assessments can go out the window.
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