Despite a potential collapse in huge DeFi (decentralised finance) yield farming returns in the next six months, the majority (64%) of panellists on Finder’s Cryptocurrency Predictions Report panel say DeFi applications will continue to grow steadily in value and user count over the next 12 months.
Decentralised finance is a sub-sector of the fast-growing cryptocurrency economy that involves the creation of dencentralised financial instruments, that exist outside traditional financial institutions. The DeFi economy has grown rapidly in the last year, up from an estimated $275m in early 2019, to $4bn by July. That is massive growth.
Of the remaining Finder panellists just 13% are bearish on DeFi application growth and 23%, including LMAX Group currency strategist, Joel Kruger, are unsure.
Is there a DeFi bubble?
“While we believe the growth is there over the coming years, we’re concerned about the potential for a bubble burst that compromises growth prospects over the next 12 months, with things having run so far and fast,” he said.
DeFi yield farming involves owners of crypto placing it temporarily at the disposal of other platforms. It can also be referred to as ‘liquidity mining.’ Some would argue it is really just loaning crypto at a premium.
On polar ends of the spectrum 13% of panellists think enormous DeFi yield farming returns will last for more than six months while 7% say that it will collapse any day. However the majority of those who gave a specific timeframe say big yields will last for less than six months (37% of the panel). Over a third (37%) say it’s impossible to predict how long huge DeFi yield farming returns will last.
What are the obstacles to DeFi yield farming?
When asked what the main obstacles to DeFi growth were, almost three quarters of the panelists (73%) say scams, excessive hype, and market manipulation would stunt it’s expansion, making this its biggest hindrance. Dr Iwa Salami, senior lecturer in commercial and financial law at University of East London, suggested how scams may raise regulatory concerns.
“DeFi raises governance, legal and operational risks issues as in typically decentralised permissionless platforms, it is difficult to hold any particular person or entity accountable for any technological failure that may result in the collapse of the system. It may also be challenging allocating liability in transactions involving anonymous parties in smart contracts – especially when used to disguise fraudulent activities.”
Will Ethereum continue to dominate DeFi?
Nearly a third of panellists (29%), including Arcane research analyst, Vetle Lunde, said Ethereum will continue to dominate the DeFi landscape over the next 12 months; Lunde noted that Ethereum has the first mover advantage despite high transaction fees and the uncertainty involved with the ETH 2.0 transition.
“Yet, protocols such as Polkadot and Solana could also experience more growth, and their interoperability could also be beneficiary for Ethereum,” he conceded.
The panel predicts ETH will be valued at US$513 by the end of the year on average as it continues to benefit from the DeFi boom and appreciation after the launch of ETH 2.0. However ETH may lose market share over the next year, with 43% of panellists predicting there will be a few (less than five) and 21% many (more than five) separate popular widely-used DeFi ecosystems.
Still, nearly half the panel (48%) think now is the time to buy Ethereum, 42% hold and just 10% sell.
Finder Cofounder, Fred Schebesta, says it’s best to hold for now, given it’s impossible to predict how long the strong performance will last.
“Like Bitcoin, Ethereum could well see its market reflect equities. Despite being strong now, there is the question of how long that will last. Those holding ETH will rest well in accumulating more if we do go lower, but it’s never easy to sleep when you don’t hold an asset that’s changing the world month on month, whether reflected in price or not”.
What about the Bitcoin price?
Bitcoin is set to hit US$14,283 by the end of the year, according to the panel average. However, predictions ranged from $7,000 to $60,000 and only just over half the panel (54%) say now is a good time to buy Bitcoin, compared to 39% who suggest holding and 7% selling.
Nottingham Trent University’s associate Professor of Cryptofinance and Digital Investment, Jermey Cheah, said that now is the time to buy and explained why this is his suggestion.
“As regions and nations begin to lock down again due to the autumn and winter seasons, a number of government policymakers and central banks such as Bank of England will need to consider the possibility of negative interest rates. This would push up Bitcoin prices”.
While Paul Levy, Senior lecturer at the University of Brighton explained that he thought holding was the best option at the moment and explained he was unsure how Bitcoin would grow over the coming years due to the uncertainty in the current climate. “Bitcoin may well be the choice during troubled times, but it has yet to prove itself is a dependable investment for many people,” he commented.