Decentralized exchanges have been around for a while now, but it’s only been since the grip of decentralized finance mania has taken hold that they’ve come into their own. The growth in DEX use has been nothing short of exponential, with volumes pretty much doubling in August and September compared with the preceding months.
But is volume alone telling the whole story? Amid the DeFi frenzy, some of the biggest winners have been DeFi governance tokens. Kicking off with Compound’s COMP token in June, other projects that followed suit have seen similar patterns. Yam Finance’s YAM, SushSwap’s SUSHI and BurgerSwap’s BURGER have all seen massive popularity at launch, only for their price to start dropping once the initial hype dies off.
Given the current data, it’s relatively easy to trace a direct correlation between the meteoric rise of DEX volume and the craze for issuing governance tokens that, so far, have not been able to hold on to their value beyond the initial hype.
Echoes of the IPO craze?
Cryptocurrency has always borrowed terms and concepts from traditional finance. The idea of an initial coin offering is derived from its traditional cousin, the initial public offering. But while an IPO is a signal of investor confidence in the future of a company, ICOs were a free-for-all, allowing anyone to mint tokens, regardless of whether or not there was any demand that would generate value.
With DeFi tokens, there is an already-established product that’s providing some value to market participants. DeFi’s governance tokens offer holders a future stake in the development of the product. In this way, DeFi tokens are more comparable to the concept of an IPO than ICO tokens ever were.
However, after the lockup period of an IPO ends, most investors dump their shares on secondary markets, according to findings from financial services firm UBS. This trend doesn’t bode well for any early recipients of DeFi tokens, as they usually HODL. Of course, DeFi is very much in its infancy, so it’s too early to draw any concrete comparisons. COMP, the token that kicked all this off, is only three months old. Omri Ross, chief blockchain scientist at trading platform eToro, believes that DeFi tokens should still be approached with caution:
“The jury is still out on the valuation fundamentals for DeFi governance tokens. Given the novelty of the space and the many complex factors going into evaluating the fundamental value of a token, the pricing of governance tokens remains highly speculative.”
A lack of BTC correlation?
DeFi tokens may show eerie correlations with IPOs, but they buck a bigger trend within crypto markets. With a few exceptions, most coins tend to follow the price movements of Bitcoin (BTC). Currently, DeFi tokens are an anomaly in that respect. While BTC has been trading within a relatively narrow range over the last month or so, DeFi tokens have shown price movements entirely uncorrelated to BTC markets. Curis Wang, co-founder and…