Yet according to Vitalik Buterin, the founder of Ethereum, certain aspects of DeFi’s growth may be unsustainable for now. He explained his sentiment in an interview with Laura Shin, a journalist covering the cryptocurrency space.
“There are sometimes DeFi things that are not very sustainable, right? One big example of this is yield farming. You can often get these really high interest rates… But the problem is that these interest rates are ultimately paid for by rewards explicitly provided by whatever protocol you are using.”
— Laura Shin (@laurashin) July 29, 2020
These rewards Buterin is talking about is altcoins such as Compound COMP, Yearn.finance’s YFI, and so on. The founder believes that because these tokens need to be scarce to have value, they cannot be printed indefinitely, so the growth is inherently not sustainable.
“It’s a short-term thing. Once these enticements disappear, you could easily see the yield rates drop back down to close to 0%. […] That’s not something that could make DeFi break, but it should definitely be a sign that […] we shouldn’t be pushing it out in front of the entire world.”
How a drop in yield rates will affect the price of Ethereum-based DeFi tokens isn’t clear. But if demand for DeFi protocols dry up as yields trend lower, it is unlikely to help.
What could compress the DeFi space further is a further Bitcoin breakout — or at least more market volatility.
The head of technical analysis at Blockfyre, a crypto research firm, commented that he’s hesitant to long altcoins if BTC start trending:
“If $BTC and $ETH start trending. I’d be cautious on longing #ALTS. Especially if this is the start of a new BTC trend upwards. The most likely out come would be alt/btc pair ratios getting drained while BTC moved past 10.5k in that scenario. I also wouldn’t look to fade 1st move.”
This has been echoed by Ari Paul, the chief investment officer of BlockTower Capital.
He also said that if Bitcoin and Ethereum begin to see volatility, altcoins are unlikely to outperform.
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