Three Simple Reasons Why Ethereum Won’t Benefit from DeFi’s Growth

Bitcoinist July 3, 2020
Updated 2020/07/03 at 9:42 AM
4 Min Read
  • DeFi-related tokens have been caught within an intense bull market over the past several weeks, with many posting 100%+ gains
  • This growth has been fueled by return-hungry investors looking to take advantage of “yield farming”
  • This trend isn’t fading as fast as some analysts expected and could continue strong in the months ahead
    Although built upon Ethereum, the DeFi sectors growth hasn’t boosted ETH’s price
  • One prominent investor doesn’t believe it will ever become the main driver of Ethereum’s price action

Despite many calling DeFi a “bubble” that would quickly pop, the trend has shown few signs of faltering. It has driven a massive influx of new users to Ethereum and is looked upon as a legitimate use case for crypto.

Much to the chagrin of many ETH investors, this sector’s growth has not yet benefited ETH’s price.

There are a number of theories for why this could be the case, and some traders have speculated that the collapse of DeFi will actually be what helps guide the crypto higher.

One prominent investor is now explaining that there are three likely reasons for why this is the case, and for why decentralized finance may never become an ETH price driver.

Ethereum Continues Consolidating as DeFi-Related Tokens Explode

At the time of writing, Ethereum is trading up slightly at its current price of $230. This is around where it has been trading for the past couple of weeks.

The crypto has been ranging sideways alongside Bitcoin for well over a month now. It has formed a range between $230 and $250, not being able to garner a clear trend.

Despite this, the DeFi sector – which is largely built upon Ethereum – has been seeing massive growth. It has even caused the number of daily ETH transactions to surpass 1 million for the first time since the late-2017 bull market.

According to data from DeFi Pulse, there is now a total of $1.7 billion locked within DeFi smart contracts. This is three times the number seen in March of this year.


Image Courtesy of DeFi Pulse

Three Reasons Why DeFi Won’t Drive Value to ETH 

One prominent investor and former Goldman Sachs partner recently explained that there are three primary reasons why Ethereum hasn’t rallied alongside DeFi-related tokens.

He notes that the first reason may simply be due to investors preferring direct exposure to the tokens.
The second reason could be due to the introduction of alternative collaterals, making it non-essential to buy ETH to participate in DeFi lending.

The final factor may come from uncertainty surrounding whether the looming Ethereum 2.0 transition will break its composability – which he says is “crucial to DeFi.”

As for what could drive value to the crypto, he points to developments related to ETH2.0 and EIP-1559 progress:

“That is not to say that ETH is not a good investment, but it seems the drivers for ETH are more related to ETH2.0 and EIP-1559 progress than direct correlation with DeFi. So if you want DeFi exposure the perp or individual tokens are a better bet.”

Featured image from Shutterstock.

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