DeFi and ICO: Compare and Contrast

Crypto story of the day

Crypto story of the day




Crypto was  higher this morning as bitcoin (BTC) trades beyond USD 11,500. Spot volumes in the last 24 hrs, perhaps surprisingly, remain below the 30-day average.


Gains among a slew of decentralized finance (DeFi) tokens have drawn comparisons to the 2017 initial coin offering (ICO) craze. We compare and contrast the two trading windows.

The 2017 ICO craze saw hundreds of businesses launch such assets, mostly via Ethereum. That year, 435 ICOs "listed" with each project raising an average of USD 12.7 million, for a total of USD 5.6 billion. By August of that year, CNBC had reported that the amount of money raised through ICOs had surpassed “…early-stage venture capital funding for internet companies….” While regulators issued several warnings, it wouldn't be until February 2019 that the SEC would formalize its first enforcement against an ICO for securities law violations.

Unlike ICOs, DeFi investors seek profits via both appreciation of assets — such as Compound’s COMP governance token — and via the actual use of DeFi, i.e. yield farming. The total capital locked in various DeFi platforms has risen from USD 1.1 billion to 4.2 billion in just over a month. Assets associated with the top 4 DeFi, except the leading maker, have seen steep appreciations in previous weeks. Compound’s COMP governance token saw nearly 5x gains in the first few days after its launch in mid-June and has a current market cap of USD 337 million. Lending protocol Aave’s LEND token has seen over 6x gains from the end of May after years of near lifelessness, bringing it to a market cap of USD 416 million. Synthetix’s SNX token has also seen an over 5x increase since the end of May, seeing its market cap rise to USD 410 million.

The surge in DeFi has been an attributed factor to ethereum’s (ETH) ongoing rally, which has seen a ~70% increase, from USD 225 on June 30 to nearly 400. ETH has, in fact, posted volumes higher than those of BTC on Bitfinex several days this week, an unusual occurrence. DeFi represents Ethereum proponents’ best opportunity, since 2017’s ICO craze, to point to increasing usage of the network: Ethereum’s transaction count is posting sustained growth, nearing all-time-highs achieved in January 2018.

However, despite what is a relatively increased use of Ethereum, DeFi remains an extremely niche subset of an already niche crypto space. Complex user interfaces and limited practical use haven't led to the incremental adoption of Ethereum needed in order to sustain growth. Similarly to the 2017 ICO craze, which saw ETH transactions hit all-time-highs, DeFi is only mimicking the adoption of Ethereum. DeFi valuations, along with ETH’s appreciation, like with ICOs, are also not capturing the inherent emerging regulatory risks, i.e. Synthetix’s plans to offer trading of Tesla and Apple stock.

Undoubtedly, DeFi will draw scrutiny of regulators. However, given how long it took the SEC to come up with the first enforcement action against an ICO, regulatory risks associated with DeFi may not become obvious to investors for some time. Having said that, once SEC enforcement did arrive, it ended ICOs. Given that precedent, investors should exercise extreme caution while seeking exposure to a space yet to meet in a high risk and high likelihood clash with regulators. This before even mentioning the complex web of carry trades little understood by participants, which we’ve previously referenced.


About the Author

FRNT Financial is a technology and sales layer that offers institutional and accredited investors access to various forms of exposure to crypto-assets.